6. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfollo risk refers to the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a partfolio. Consider the foliowing case: Olver is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holfings in his portfolio are shown in the following table: What is the expected return on Oliver's stock portfolio? 7.80% 15.60% 10.40% 14.04% Suppose each stock in Oiver's portfolio has a correlation coefficient of 0.40(=0.40) with each of the other stocks. The market's average standard deviation is approximately 20%, and the weighted average of the risk of the individual securities in the partialy diversified four-stock portfollo is 33%. If 40 additional, randomly selected stocks with a correlation coefficient of 0.30 with the other stocks in the portfolio were added to the porffollo, what effect would this have on the portfolios standard deviation (p) ? It would decrease gradually, settling at about o\%. It would gradually settle at approximately 20%. It would gradually setvie at approximately 50%. It would gradually setile at about 35%