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A collection of financial assets and securities is referred to as a portfollo. Most individuals...

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Accounting

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A collection of financial assets and securities is referred to as a portfollo. 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 retum 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 retum on Andre's stock portfolio? 11.10%16.65%8.32%14.99% Suppose each stock in Andre's portfol ation coefficient of 0.4(=0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measul andard deviations) included in the partially diversified four-stock portfolio is 32%, the portfolio's standard deviation (p) most Hkely is 32%

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