(20) Suppose that Paul is a consumer solving a twoperiod optimization problem, and that there are two potential states ofthe world next period, representing high H and low L consumption, that occur with probabilities 1TH = 0.4 and TEL = 0.6. Suppose that there are two stocks, each with zero dividend, whose prices at present and in each future state are given below. Price l Activision Bethesda Current l 40 20 State H 10 50 State L 50 10 (a) (5) Using the law of one price, nd what Paul's stochastic discount factor M1 in states L and H must be. (b) (5) Assume that Paul has log utility u(C) = log C and that his rate of time preference was 5 = 0.9. If his consumption today is CO = 1000, use the stochastic discount factor to calculate his future consumption Cl in states L and H. (c) (5) Suppose that Paul receives no endowment next period, so that all of his future income comes from the payoffs to his investments. How many shares x of each stock must he hold for his consumption levels in each state to be what you found? (d) Calculate what Paul's initial wealth A0 must be