Explain the relationship between saving, investment and net capital outflow.

Assume that the Capital Asset Pricing Model holds and returns are generated in accordance with a consistent form of the Single Index Model. {i} |Given that the annual risk free rate of return is 5%, that the expected rate of return on the market portfolio is ass and the expected rate of return on a chosen portfolio is This, calculate the beta of the chosen portfolio. {ii} Brieyr explain, in words, what is meant by systematic and specic risk. (iii) Calculate the systematic and specic risk {as measured by variance) of an asset with expected rate of return of 5.5%, standard deviation of return of [1] [1] 3i]%. Assume that the expected rate of return on the market portfolio and risk free rate of return are as in part (i) and the standard deviation of the return on the market portfolio is 20%. [1] [Total 5] {i} List the steps involved in the process of conventional asset liahilityr modelling. [4] {ii} lEll'utline the inputs to the model and the considerations to he taken into account when choosing the inputs. {iii} List the practical constraints to the asset liahility modelling process. [5] [4] [Total 131 {i} State what is meant by \"excessive volatility" in an investment market. {ii} Describe the work of Schiller in testing whether equity markets are [2] \"excessiver volatile\" stating the conclusions drawn and an},r criticisms of this investigation. 4 (i) Demonstrate using a simple example relating to long and short positions in zero-coupon bonds of terms one year, two years and three years that a model based on a flat yield curve permits arbitrage opportunities. [4] (ii) Consider a model of yield curves where the forward yield at term t is: forward yield(t) = etR + (1 -e-")_ where R is the limiting yield for short bonds L is the limiting long forward yield o is a positive parameter (a) Derive an expression for the price of a zero coupon bond of term T. (b) Derive an expression for the spot yield at term 7 and hence also an expression for the limiting spot yield