No, but 2 exes will work (and it will still be portable). There will be 3 files total: YourApp.exe, wyUpdate.exe, and client.wyc. You will be able to deliver updates fine whether your app is on a USB stick or in a folder on their main hard drive.
We don't recommend "bundling" or "packaging" wyUpdate.exe using a VM tool. We don't test for this - for all we know it will fail.
Short answer: Yes, wyUpdate supports portable updating. No, you can't embed it into a "bundled" exe.
Does this help?