I would add that there should probably be three options - work items from this project, from this portfolio, all. There are definite use cases for each.
filtering of "work items from this project only" should show the current project only, not from the whole portfolio
filtering of "workitems from this project only" should show the current project only, not from the whole portfolio
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I agree with Ariel! This has been a significant point a confusion for our users. The ability to filter down to the project should be available.