(Solution) - An individual with cash to invest has two investment choices Buy -(2025 Original AI-Free Solution)

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An individual with cash to invest has two investment choices:
Buy a stock fund which every year either earns 40% or -20% with a 50/50 probability.
Buy a bond fund which every year returns either 5% or 0% also with 50/50 probability.
Assume that the returns on the two funds are independent, and that returns from year to year are also identical. Also assume an initial portfolio value of $1. (The answers, however, will be unaffected if you use a different initial portfolio value.)
a. Which fund does the investor prefer if he looks at his portfolio i/ once a year; or ii/ once every two years?
b. How does your answer to part a. help us understand the equity premium puzzle?