I .

Suppose 2 stocks have

returns share
per
X and Y ,
with

E CX) -

-
E CY ) =3

Var ( x) =L
Var ( y ) -
-
z

Gr ( X Y ) ,
= -

I
buy s shares of X

at t shares of Y

a. Find the total different .

of the variance of the

returns
b I currently hold 10
.

shares of each stock .

I buy one share of the

first stock and sell one

of the second .
Estimate

the the variance

change in
Does
of the
portfolio .

this decrease or increase

the risk ?
C. Find the maximal

of
expected return
with
a

portfolio
variance

250 .
 w/
2 .
I own a
portfolio
return X .
I would like

to add shares of two

stocks w/ returns
per
share Y and Z to minimize

my
risk .

Buying s shares

of Y and t shares of Z

yields overall return

Xxsyttz

Var Cy ) =p
Suppose
Var (7) =3

Cov (X .
Y) = -
60
 Cov ( X , 't) -
-
O

Cov ( Y -27=-1
,

a. Find the optimal s

and t to minimize

the variance of my
return .

the costshare
b. Suppose
Y 30 and of
of is

Z is 10 .
I have 100 to
 Find and t
invest .
s

that minimize the variance

constraint
subject to a
given .

3. Use the total different .

to approximate
0.2 - Sin ( oil)
e

4 .
Find and classify the

of
critical
points
y Zyx
'
f (x. y) -
-
-

y
5. Find the max and min

e' xz
of f (x.
y)
=

subject to x' +5=1

 Answers .

la .
Z = SX it Y
-

d 2- = ( zs t) dst ( 4T
-
-

) dt
s

b DZ= 20
-

Decreases the
risk

F-
C E CZ) = 120
.
TH

Za .
t =
¥
II
s =

29
2b .
S =
16043
I
t =
-

43

3 ,
BZ I l I
.

4 .
Co , t) -
relative min

(o ,
-

IT ) -
relative max

saddle
( i ,
o ) -

point
C- i. o) -
saddle
point .
5 . ( ETE ,
-
I t E ) -
Max

C- TET ,
-

I + Fr I -

max

(O ,
l) -
min

(o .
- )
i -
m in