Differentiation and optimization

Dr. Benoit Chevalier-Roignant

Usual derivatives
Key takeaways

Some functions admit (first-order) derivatives that you are supposed to know

, , , ,

Suppose 𝑓 and 𝑔 are two functions. We note the composition of functions 𝑓 ∘ 𝑔: in other words,
(𝑓 ∘ 𝑔)(𝑥) is equivalent to 𝑓(𝑔(𝑥))The following rule are important to remember:

(𝑓 + 𝑔) = 𝑓 + 𝑔
(𝑓 × 𝑔) = 𝑓 × 𝑔 + 𝑓 × 𝑔
(𝑓 ∘ 𝑔) = 𝑓 ∘ 𝑔 × 𝑔

Exercises

Differentiate the following functions (once):

1. 𝑓(𝑥) = 3𝑥 + 2
2. 𝑓(𝑥) = 3/𝑥
3. 𝑓(𝑥) = 𝑒
4. 𝑓(𝑥) = 𝑙𝑛(5𝑥 + 3)
5. 𝑓(𝑥) =
6. 𝑓(𝑥) = (5𝑥 + 2𝑥)
( )
7. 𝑓(𝑥) = ( )
Polynomial function
A polynomial function is a function of the form

𝑓(𝑥) = 𝑎 𝑥 + 𝑎 𝑥 +⋯ + 𝑎 𝑥 + 𝑎 𝑥 + 𝑎 ,
where 𝑛 is a nonnegative integer and the {𝑎 } are constant coefficients. Note that a polynomial
function can be equivalently written as

𝑓(𝑥) = 𝑎 𝑥 .
,…,

Recalling the previous paragraph on derivatives, we can easily study the derivatives of a polynomial
equation, given by

𝑓 (𝑥) = 𝑘𝑎 𝑥 .
,…,

𝑓′′(𝑥) = 𝑘(𝑘 − 1) 𝑎 𝑥 .
,…,

It is not easy to establish in general whether a polynomial function is increasing, decreasing, convex
or concave, nor to determine whether there exist roots, i.e., the values of the variable 𝑥 such that
𝑓(𝑥) = 0, and if such roots exists whether there are any other roots.
Quadratic function
Key take-aways

The quadratic function, a polynomial function of degree 𝑛 = 2, has the form

𝑓(𝑥) = 𝑎𝑥 + 𝑏𝑥 + 𝑐.
Such polynomial forms are common in economics because its admits two roots (not necessarily
distinct), given by

−𝑏 − √𝑏 − 4𝑎𝑐,
𝑥 =
2𝑎
−𝑏 + √𝑏 − 4𝑎𝑐,
𝑥 =
2𝑎
provided that 𝑏 > 4𝑎𝑐 (we ignore complex numbers). This allows us to re-write the quadratic
function as

𝑓(𝑥) = 𝑎(𝑥 − 𝑥 )(𝑥 − 𝑥 ).

It might also be possible to find the roots of a polynomial of degree 𝑛 = 3 if one of the roots is easily
identified. Then, we can transform the polynomial of degree 3 into the product of a linear function
and a quadratic function. We then use the formulas for the roots of the quadratic functions to
determine the two remaining roots of the polynomial function of degree 3.

Exercises
Optimization
Key take-aways

Suppose you are given a function 𝑓(⋅), called objective function; let 𝑥 denote the variable. An
optimization problem is a problem of the form

sup 𝑓(𝑥)

in the case of a maximization or

inf 𝑓(𝑥)

in case of a minimization. The value 𝑥 ⋆ such that

𝑓(𝑥 ⋆ ) = sup 𝑓(𝑥)

is called the (global) maximum, while the value 𝑥⋆

𝑓(𝑥⋆ ) = inf 𝑓(𝑥)

is called the (global) minimum.

Optimization is a rather technical subject matter in the mathematics literature especially if

there are constraints (e.g., on the values 𝑥 can take or 𝑓(𝑥) needs to satisfy) or if the function 𝑓(⋅)
does not have derivatives or if the first-order derivative of 𝑓(⋅), 𝑓 (⋅), is not monotone (i.e., if it is
not either increasing or decreasing). The optimization problem in the module “investment
management” or in any standard econ modules are fairly tractable. You should remember the
following facts:

- A (twice differentiable) function 𝑓(⋅) is convex (respectively concave) if

𝑓 (𝑥) > 0 (< 0)

for all 𝑥.

- A (differentiable) concave (respectively convex) function 𝑓(⋅) admits an (interior) global

maximum (respectively minimum) at the point 𝑥 where
𝑓 (𝑥) = 0.

Exercise

1. Determine if the functions from the previous exercise are convex/concave and what are the
optimum
2. Find the portfolio with the minimum variance