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What allocation do you choose under expected utility theory

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Question - Two assets named A and B. With probability p, asset A will experience a total loss in value, otherwise it will retain its value. Similarly for asset B. Furthermore, the returns of asset A and B are independent.

You can make one of the following two choices:

a) Allocate 100% of your wealth to A, or

b) Allocate 50% of your wealth to A and 50% to B.

What allocation do you choose under Expected Utility Theory?

What allocation do you choose under Prospect Theory, with no probability weighting?

Reference no: EM133007802

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