There are TWO QUESTIONS. Answer ALL QUESTIONS. The marks shown within each question indicate the weighting given to component sections.
Answer ALL questions1.
(a) With reference to an appropriate diagram, explain why the market portfolio of risky assets must lie at the tangency between the capital market line and the efficient frontier for risky assets.[WORD LIMIT: 500 words][25marks]
(b) With reference to a worked numerical example, discusshow the assumptions of prospect theory make investment behaviour depend uponwhether a stock is trading at a gain or at a loss. [WORD LIMIT: 500 words][25marks]
2.Explain why the concept of “closing out” is so important in the functioning of futures markets. [WORD LIMIT: 1,500 words][50 marks]END OF QUESTION PAPER
