1 Economics 1723: Section 2 Notes Today’s Plan: Problem Set 1 Solutions (15 minutes) Mean-Variance Analysis (25 minutes) Review Problem (15 minutes) 1. Any questions about material so far? 2. Mean-Variance Analysis with Two Risky Assets 2.1 Setting: the Mean-Variance Space The basic question behind the mean-variance analysis is: How much risk should an investor take? What is the optimal portfolio allocation, as a trade-off between return and volatility? Question 1: Why do typical investors dislike volatility? Can you give a counter-example?