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Underweight

Underweight

Underweight refers to a situation where an investor holds a smaller allocation of a particular asset or asset class in their portfolio compared to a benchmark or recommended allocation. Being underweight in an asset suggests a more cautious or bearish outlook on its future performance. Fund managers or analysts might also issue an “underweight” rating, indicating that they expect the asset to underperform relative to others.

Example

An investor holds 5% of their portfolio in technology stocks, compared to the benchmark allocation of 15%, indicating an underweight position in the technology sector.

Key points

• Refers to holding a smaller allocation of an asset relative to a benchmark or recommended level.

• Indicates a cautious or bearish outlook on the asset’s future performance.

• Common in portfolio management to express a view on underperforming sectors or assets.

Quick Answers to Curious Questions

Why might an investor choose to be underweight in a particular asset?

The investor may have a cautious or bearish outlook on the asset’s future performance, preferring to allocate more capital to other assets.

How does being underweight affect portfolio diversification?

It reduces exposure to certain sectors or asset classes, potentially impacting diversification and risk depending on the overall portfolio balance.

What does an underweight rating from an analyst indicate?

An underweight rating signals that the analyst expects the asset to underperform relative to other investments or the broader market.

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