Maximizing return while minimizing risk is the goal.

There are two types of risk that need to be evaluated when making an investment in equities.

Business Risk: This is the risk that the company you invest in suffers a major setback and you lose most if not all your investment.  Business risk can be minimized through fundamental analysis of the company including identifying the company’s strategy.  A well selected portfolio of 20 – 30 stocks will achieve 90% of the diversification of a mutual fund.

Market Risk: This is the risk of the overall market declining because of economic conditions deteriorating.  Asset allocation and professional judgement is the key to reducing market risk.  Allocation of investments is determined by the risk of the asset class and the position of the business cycle.

While mutual funds tout their reduction of risk through diversification, they are only speaking of business risk.  Therefore, I believe that a disciplined quantitative analysis can identify stocks that will outperform the market.  This along with fundamental analysis and utilization of an allocation model should result in a portfolio that maximizes return while minimizing risk.