Define 'concentration risk'.

Concentration risk refers specifically to the risk that arises from a lack of diversification within an investment portfolio or financial institution's holdings. When an entity invests heavily in a limited number of assets or sectors, its financial performance becomes heavily reliant on a few concentrated positions. This can lead to significant losses if those specific investments underperform or face adverse conditions.

In contrast to this, other risks such as liquidity risk, which pertains to the ability to buy or sell assets quickly without causing a significant impact on their prices, and excessive leverage, which involves borrowing beyond a safe capacity, are related but focus on different aspects of financial stability. Market inefficiency is another distinct concept that deals with the speed and accuracy at which information is reflected in asset prices.

Understanding concentration risk is vital in risk management, as maintaining a diversified portfolio can help to mitigate potential losses that arise due to a downturn in a particular investment or sector. By minimizing concentration, investors can achieve better risk-adjusted returns over time.