As promised, the Finance 4335 class problem set and solutions for problems 1-3 on that problem set are linked here:

I strongly encourage everyone to try tackling problems 4-5 prior to Thursday’s class meeting of Finance 4335. Problem 4 involves finding the expected return and standard deviation for an equally weighted portfolio, whereas problem 5 involves finding the expected return and standard deviation for the least risky combination of assets *a *and *b*. The expected return and variance for these portfolios are:

Expected portfolio return:

Variance of portfolio return:

In problem 4, equal weighting implies that . whereas in problem 5, the least risky combination of assets *a *and *b *can be determined by differentiating the variance equation above with respect to , setting the resulting equation to 0, and solving for (see p. 17 of today’s lecture note for the math details); thus the lowest variance combination of assets *a *and *b *can be determined by setting and