Which metric is used to evaluate risk concentration in a loan portfolio?

• A. Debt yield ratio
• B. Concentration metrics
• C. Loan-to-value
• D. Interest rate hedging

Answer: (B)

Concentration risk in a loan portfolio looks at how exposures are distributed across borrowers, sectors, and geographies. The metric that best captures this is concentration metrics, because they quantify how clustered or spread out the portfolio is. By measuring the dispersion of exposures—often through indicators like concentration thresholds or more formal measures such as the Herfindahl-Hirschman Index—these metrics reveal whether a large portion of risk sits with a few borrowers, industries, or regions. That visibility helps a lender set diversification limits and take actions to reduce risk, such as rebalancing the portfolio or tightening exposure to dominant segments.

Other metrics touch on different risk aspects. The debt yield ratio evaluates a loan’s income relative to the loan amount to gauge debt service capacity, not portfolio diversification. The loan-to-value ratio focuses on collateral value versus loan size, again addressing collateral risk rather than how exposures are spread. Interest rate hedging deals with protecting against rate moves, not concentration of exposure.