ECON 424 Final: ECON 424 UW Final Exam Solutions Spring 06
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This is a closed book and closed note exam. However, you are allowed one page of handwritten notes. Answer all questions and write all answers in a blue book. I. matrix algebra and portfolio math (25 points) Let ri denote the continuously compounded return on asset i (i = 1, , n) with e[ri] = i, i and cov(ri, rj) = ij. Define the (n 1) vectors var(ri) = 2 (cid:35) (cid:34) (cid:34) (cid:35) (cid:37) (cid:35) (cid:34) The vectors m, x, and y contain portfolio weights that sum to one. Using simple matrix algebra, answer the following questions: for the portfolio defined by the vector x, give the expression for the portfolio return (rp,x), the portfolio expected return ( p,x), and the portfolio variance ( 2 p x: write down the optimization problem used to determine the global minimum variance portfolio assuming short sales are allowed.
