^{25}Note the choice of a coefficient of relative risk aversion of 6, in contrast with the choice of 2 made
for the previous problems. This choice reflects the well-known ‘stockholding puzzle,’ which is the
microeconomic equivalent of the equity premium puzzle: For plausible descriptions of income uncertainty,
rate of return risk, and the equity premium, the typical consumer should hold all or nearly all of their
portfolio in equities. Thus we choose a high value for the coefficient of relative risk aversion in order to
generate portfolio structure behavior more interesting than a choice of 100 percent equities in every
period for every level of wealth.