A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysisan integral part of finance. Just like standalone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: What is the expected return of Andre\'s stock portfolio? 15.60% 10.40% 14.04% 7.80% Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p = 0.4) with each of the other stocks. If the weighted average of the risk (standard deviation) of the individual securities in the partially diversified portfolio of four stocks is 37%, the portfolio\'s standard deviation (a_P) most likely is 37%. Solution part 2 less than .

1. A collection of financial assets and securities is referred to as a portfolio. Most individuals and
institutions invest in a portfolio, making portfolio risk analysisan integral part of finance. Just
like standalone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to
the possibility that an investment portfolio will not generate the expected rate of return.
Analyzing portfolio risk and return involves the understanding of expected returns from a
portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio
consisting of only four stocks. The stock holdings in his portfolio are shown in the following
table: What is the expected return of Andre's stock portfolio? 15.60% 10.40% 14.04% 7.80%
Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p = 0.4) with
each of the other stocks. If the weighted average of the risk (standard deviation) of the individual
securities in the partially diversified portfolio of four stocks is 37%, the portfolio's standard
deviation (a_P) most likely is 37%.
Solution
part 2
less than
Percent of portfolio Expected return Weighted return
Artemis 20% 6% 1.20%
Babish & Co 30% 14% 4.20%
Cornell Industries 35% 13% 4.55%
Danforth Motors 15% 3% 0.45%
Expected Return 10.40%