# much of hâ€¦ Show more . Consider a risk averse investor wit

much of hâ€¦ Show more . Consider a risk averse investor with utility function U (W ) = W^0.5 who is deciding how much of her initial wealth (W 0) to invest in a bond and how much to invest in a stock. The current prices of the bond and stock are B0 and S0 respectively. Although neither security pays dividends or interest, Investor A expects to receive income from selling these securities at their end-of-period prices, which are B1 for the bond and S1 for the stock. Since the bond is riskless, its end-of-period price is known with certainty to be B1= B0(1+r), where r is the riskless rate of interest. The price of the stock at t = 1 can be high or low; i.e., it will be S0(1+s) with probability .6 and it will be S0(1-s) with probability .4. Furthermore, assume that W 0= \$100, r = .05, and s = .3. A. How much of the investorâ€™s initial wealth should be invested in the stock, and how much in the bond? B. What will be the investorâ€™s expected wealth and standard deviation of wealth at t = 1 from this investment strategy? C. Suppose that this investor starts out with initial wealth of \$200 rather than \$100. In this case, what proportion of her initial wealth should be invested in the stock, and how much in the bond? â€¢ Show less

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