6. Portfolio expected return and risk Aa Aa 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. Portfolio 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 portfolio. Consider the following case: Emma is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in her portfolio are shown in the following table: Percentage of Portfolio 20% Stock Artemis Inc. Babish & Co. Cornell Industries Danforth Motors Expected Return 8.00% 14.00% 12.00% Standard Deviation 24.00% 28.00% 31.00% 30% 35% 15% 5.00% 33.00% What is the expected return on Emma's stock portfolio? 14.51% 10.75% 16.13% 8.06% Suppose each stock in Emma's portfolio has a correlation coefficient of 0.4 (p = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 29%, the portfolio's standard deviation (Op) most likely is 29%. less than more than equal to