Question

You own a large share portfolio. Currently 40% of this portfolio is invested in two small IT companies where you own, in each case, about 20% of each company. The rest (60%) of your share portfolio is invested in 6 large mining companies quoted on both the London and Frankfurt stock exchanges. Your share holdings in these 6 companies are a tiny proportion their market capitalization.

Explain the risks arising from your portfolio composition and comment on how you might want to change the composition of your portfolio

Answer 1

The 40% of the Total Portfolio consists of two small IT companies which comprise of 20% of each company's total equity . This means that the total market capitalisation of each of these companies must be equal to the total size of our Portfolio. Example- Let's say total portfolio is of $100, hence $40 must be invested in 20% shareholding of two IT companies hence total capitalisation of each of the companies must be of $100.

Being small IT companies if the companies can't get projects or none of the developed softwares can't get market recognition, 40% of the portfolio is at risk. Also the shares seems to be unquoted , their will be liquidity issue as well.

Rest of the 60% is in large mining companies and the same are quoted on London and Frankfurt stock exchanges and seems to be bluechip company and the shareholding is minor so it's easy to liquidate the same and any loss can be predicted from sliding stock prices.

So the investment from the Small IT companies should be shifted to large cap stocks.