1. a. Using the Consumption Capital-Asset Pricing Model (CAPM), show that a marginal increase in holdings of an asset that is risky does not increase the variance of the individual's consumption b. Further show that the expected-return premium that an asset must offer relative to the risk-free rate is proportional to the covariance of its return with consumption. c. With derivation explain why it is difficult to reconcile returns on stocks and bonds 2. Within the Mundell-Fleming model assuming perfect capital mobility, analyse the effects of a positive shock to money demand (i.c., an increase in the demand for money for given levels of income and the interest rate). Consider the effect of the shock on income when the exchange rate is fixed and when it is flexible. 1. a. Using the Consumption Capital-Asset Pricing Model (CAPM), show that a marginal increase in holdings of an asset that is risky does not increase the variance of the individual's consumption b. Further show that the expected-return premium that an asset must offer relative to the risk-free rate is proportional to the covariance of its return with consumption. c. With derivation explain why it is difficult to reconcile returns on stocks and bonds 2. Within the Mundell-Fleming model assuming perfect capital mobility, analyse the effects of a positive shock to money demand (i.c., an increase in the demand for money for given levels of income and the interest rate). Consider the effect of the shock on income when the exchange rate is fixed and when it is flexible