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Assume a two-stock portfolio is created with $50,000 invested in both High Tech and Collections. Calculate the portfolio's expected return (a weighted average of the returns of the portfolio's component assets) r_p = 0.10 (-2.5%) + 0.20 (0.5%) + 0.40 (5.8%) + 0.20 (11.3%) + 0.10(11.3%) = 5.5% Calculate the portfolio's standard deviation sigma_p = [0.10 (-2.5- 5.5)^2 + 0.20(0.5-5.5)^2 + 0.40 (5.8 - 5.5)^2 + 0.20(11.3-5.5)^2 +-0.10(11.3 - 5.5)^2]^1/2 = 4.6% sigma_p = 4.6% is much lower than the sigma_i of either stock (sigma__HT = 20.0%; sigma_Coll = 11.2%). sigma_p = 4.6% is lower than the weighted average of High Tech and Collections' sigma (= 20%* 50% + 11.2%*50% =15.6%). Therefore, the portfolio provides the average return of component stocks, but lower than the average risk. Why? Negative correlation between stocks