In the financial world, you may have a colleague who could replace his concentrated holdings in company stock with a diversified portfolio, but he refuses to do so. If you can't sell short the company stock, you can't do the arbitrage [Note the implication -- the diversifiable risk is an arbitrage (although subject to limitation). Imagine being long parallel portfolio that is diversified scaled to the vol of the concentrated holding plus short the concentrated holding. How does such a long short portfolio perform? What short rate would ruin it?]