There are two assets in the market, 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.

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

What allocation do you choose if your preferences are represented by Expected Utility Theory?

What allocation do you choose if your preferences are represented by Prospect Theory, with no probability weighting?