You are a risk-averse investor with a CRRA utility function. You are faced with the decision to invest your total wealth W of £1,000,000 into a riskless asset which generates a return of 5% or into a risky asset which either generates a return of 20% or a loss of −4% with equal probability. Find the optimal investment allocation with a coefficient of relative risk aversion η=2, and comment on your results.

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