Portfolio risk and returns refer to the potential risks undertaken and the rewards achieved from investments.

The risk associated with a portfolio refers to the volatility of returns from expected outcomes. Higher risk is associated with higher returns and significant losses, while lower risk is associated with low returns and negligible losses.

Consider Kate. She considers three portfolios. Portfolio A is invested in government bonds and bank deposits, which are considered low-risk and have stable but relatively low returns.

Portfolio B is invested in a mix of stocks, which are considered higher risk due to their potential for significant price fluctuations but offer higher average returns than bonds.

Kate can choose the portfolio based on her risk tolerance, time horizon, and expected returns.

To manage portfolio risk, Kate uses diversification by spreading her investments across asset classes like stocks and bonds and sectors such as technology and healthcare.

This strategy aims to reduce risk by offsetting the negative performance of some investments with the positive performance of others.