a. Will the limitation to 20 stocks likely increase or decrease the risk of the portfolio? Explain.

Question:

a. Will the limitation to 20 likely increase or decrease the risk of the Explain.
b. Is there any way Hennessy could reduce the number of issues from 40 to 20 without significantly affecting risk? Explain.

Hennessy & Associates manages a $30 million equity for the multimanager Wilstead Pension Fund. Jason Jones, financial vice president of Wilstead, noted that Hennessy had rather consistently achieved the best record among the Wilstead’s six equity managers. Performance of the Hennessy had been clearly superior to that of the S&P 500 in 4 of the past 5 years. In the one less-favorable year, the shortfall was trivial.
Hennessy is a “bottom-up” manager. The firm largely avoids any attempt to “time the market.” It also focuses on selection of individual rather than the weighting of favored industries.
There is no apparent conformity of style among Wilstead’s six equity managers. The five managers, other than Hennessy, manage portfolios aggregating $250 million made up of more than 150 individual issues.
Jones is convinced that Hennessy is able to apply superior skill to stock selection, but the favorable returns are limited by the high degree of diversification in the Over the years, the generally held 40–50 with about 2%–3% of total funds committed to each issue.
The reason Hennessy seemed to do well most years was that the firm was able to identify each year 10 or 12 issues that registered particularly large gains.
On the basis of this overview, Jones outlined the following plan to the Wilstead pension committee:
Let’s tell Hennessy to limit the to no more than 20 Hennessy will double the commitments to the that it really favors, and eliminate the remainder. Except for this one new restriction, Hennessy should be free to manage the exactly as before.
All the members of the pension committee generally supported Jones’s proposal because all agreed that Hennessy had seemed to demonstrate superior skill in selecting Yet the proposal was a considerable departure from previous practice, and several committee members raised questions.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...