When I purchased new iPhone 4 its Personal Hotspot was working well, I used mostly USB cable to connect to the internet from my computer and occasionally needed to use the WiFi. But after I upgraded to iOS 5.0.1, I was unable to connect through Wi-Fi because whenever I tried to discover my iPhone it was not discover-able on my computer (same problem can happen if you upgrade to iOS 5.1 ). When asked from many of my friends they were also having the same problem, also on my blog some people reported the same even the WiFi signals were dropped in some cases.
I found very simple solution to this Wi-Fi Hotspot problem what you need is only reset your network settings.
Note: Recall your WiFi security key if you are connected to any external Wi-Fi connection, because after resetting the network settings you will not be able to connect to external Wi-Fi without network key if it is secure otherwise no problem.
Go to Settings —-> General —-> Scroll down to the end and tap Reset –> Reset Network Settings
Your iphone will restart automatically and below are the steps on How To Turn On the Personal Hotspot:
Go to Settings —> Personal Hotspot —> Select On (Note down the Wi-Fi Password)
Now you can go to your computer and turn on Wi-Fi you will definitely see the name of your iPhone select and click connect and provide the Wi-Fi Password given in your hotspot settings.
If you want to use internet through USB cable you must install iTunes so that your computer can recognize the iPhone. After turning the Hotspot on just connect USB and your computer will connect to internet automatically.
Here you go.