Security and Portfolio Analysis - Case Study Example

He has suggested a limitation of 20 high-yielding stocks in the portfolio, instead of 40 stocks, of which only 10-12 gave considerable returns. While, on the face of it, if Hennessy accepts Jones' suggestion and invests the corpus in only 20 "good" issues, it might translate into lesser work, easier fund management and higher returns for the client and Hennessey himself. However, if there is any shift in the micro economy of the region, this might translate into lower profitability for the portfolio.

Diversification spreads the risk involved and makes sure that if one sector is not doing favourably, stocks from another sector provide considerable gains. Broadly speaking, the sectors could be divided into infrastructure, banking, power, natural resources, energy, consumer goods, hospitality, healthcare, transport, automobiles, food, sugar, metals, shipping, finance, construction, oil, pharma, alternate energy, Information Technology, etc. Based on the size of the capital, the stocks could be classified as large caps, mid caps or small caps.

By investing an amount in a majority of the sectors and each of the large, mid or small cap companies, the risk of the portfolio is reduced. . Depending on the stage in which the economy is in, exposure to such sectors could either be increased or decreased to increase the overall profitability. There are certain stocks of well managed companies, which give consistent returns to the stockholder, irrespective of the phase the market is in: whether bull phase or bear phase.Thus, I would rather prefer Hennessey's strategy of investing in 40 stocks than increasing the risk by investing in 20 stocks.b. Is there any way Hennessy could reduce the number of issues from 40 to 20 without significantly affecting risk Explain.

The reason Hennessy seemed to do well most years was because the firm was able to identify each year 10 or 12 issues, which registered particularly large gains. So, picking out these 10-12 issues and doubling the amount invested in these companies would logically lead to the same profits.The only way Hennessy could reduce the number of issues from 40 to 20 without significantly affecting risk, would be to invest in companies having a record of consistent returns over a significant period of time.

This might however mean a lowering of returns in a bear market. No pains, no gains, being the thumb rule in the capital markets, this might just eat into the profitability of the portfolio.2. One committee member was particularly enthusiastic concerning Jone's proposal. He suggested that Hennessy's performance might benefit further from reduction in the number of issues to 10. If the reduction to 20 could be expected to be advantageous, explain why reduction to 10 might be less likely to be advantageous.

(Assume that Wilstead will evaluate the Hennessy portfolio independently of the other portfolios in the fund.) 2. A bottom-up investor believes that superior companies will do well even if