Risk Aversion and Portfolio Allocation Consider a portfolio allocation problem that is a special case of those we studied in class. An investor has initial wealth Yo = 100. The investor allocates the amount a to stocks, which provide return rg = 0.30 in a good state that occurs with probability 1/2 and return b = 0.05 in a bad state that occurs with probability 1/2. The investor allocates the remaining Yo a to a risk-free bond, which provides the return rs = 0.10 in both states. Assuming that the investor has VN-M expected utility, with Bernoulli utility function of the logarithmic form u(Y) = ln(Y), calculate the optimal amount a* that the investor should allocate to stocks. Re-solve the portfolio allocation problem from question 1, above, assuming that instead of taking the logarithmic form, the investor's Bernoulli utility function is yl-2-1 u(Y) 1-7 with 7 = 2, or more simply, Y-1-1 1 u(Y) +1. -1 Which investor is more risk averse: the investor from question 1 or the investor from question 2? Which investor allocates more of his or her wealth to stocks