Formula Sheet for the Midterm Exam

Weights in the minimum variance portfolio having only two risky securities

2
σ 2−cov (r 1 , r 2)
w 1= 2 2
σ 1 +σ 2 −2 cov (r 1 ,r 2)

w 2=1−w1

Weights in the optimal risky portfolio when there are two risky securities and a risk-free asset

[ E(r 1)−r f ] σ 22− [ E (r 2 )−r f ] σ 1 σ 2 ρ12

w 1=
[ E(r 1 )−r f ] σ 22 + [ E(r 2)−r f ] σ 21− [ E (r 1 )−r f + E(r 2)−r f ] σ 1 σ 2 ρ12

w 2=1−w1

Variance of a risky portfolio (P) is

n n n

∑w 2
i σ + ∑ ∑ wi w j σ ij
2
i
i=1 i=1 j=1
i‡j