Enumerator five roles of the central bank in sn economy.

Dseries the relationship between money supply and the level of inflation in an economy.

Outline how Monte Carlo simulation can be used in asset liability modelling. Describe how the Black-Scholes pricing formula for a European call option can be used to determine implied volatility. (i) Let U(W) be the utility function of an investor's wealth, W. The first and second derivatives of U with respect to W are positive. Explain what these conditions imply about the investor's economic characteristics. (i) Define the delta, gamma and theta of an option. Describe the forms of the Efficient Markets Hypothesis (EMH). [3] Outline the role that portfolio managers have even if the market is perfect and fully efficient.You are given the following information for returns on two stocks / and Z. I Z 0.04 0.09 1.20 1.50 0.25 0.40 R. = 0.16 and a = 0.20 The returns generating process is assumed to be as follows: R=atBR te where R is a random variable representing the return on the stock; R is a random variable representing the return on a market index; e is the residual term; of, of and of are the variances of the stock, index and residual term, respectively. The residual terms of the returns generating processes for stocks I and Z are assumed uncorrelated with each other and have a mean of zero. Calculate the following: (1) The mean and variance of the returns of each stock. [3] (1i) The covariance of returns between the stocks. [1] (ili) The beta of an equally-weighted portfolio of the two stocks. [1] (iv) The expected return and variance of an equally-weighted portfolio of the two stocks. [3]