a) With reference to an appropriate diagram, explain why the market portfolio of risky assets must lie at the tang-ency between the capital market line and the efficient frontier for risky assets.
(b) With reference to a worked numerical example, discuss how the assumptions of prospect theory make investment behavior depend upon whether a stock is trading at a gain or at a loss.
2.Explain why the concept of “closing out” is so important in the functioning of futures markets.
