Stephanie Watson Is 23 Years Old and Has Accumulated $4,000

question 26

Multiple Choice

Stephanie Watson is 23 years old and has accumulated $4,000 in her self-directed defined contribution pension plan.Each year she contributes $2,000 to the plan, and her employer contributes an equal amount.Stephanie thinks she will retire at age 67 and figures she will live to age 81.The plan allows for two types of investments.One offers a 3.5% risk-free real rate of return.The other offers an expected return of 10% and has a standard deviation of 23%.Stephanie now has 5% of her money in the risk-free investment and 95% in the risky investment.She plans to continue saving at the same rate and keep the same proportions invested in each of the investments.Her salary will grow at the same rate as inflation. How much can Stephanie be sure of having in the safe account at retirement?

• A)$37,221
• B)$16,423
• C)$11,856
• D)$21,156.

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Definitions:

Borrow Money

The act of obtaining funds from another party with the promise of repaying the principal amount along with potential interest.

Buy Stocks on Margin

The practice of borrowing money from a broker to purchase stock, using the bought securities as collateral for the loan.

Risk Free Asset

An investment that is expected to return its original value without any loss and with a certain rate of interest; considered to have zero default risk.

Rate of Return

The increase or decrease in the value of an investment during a set time frame, represented as a proportion of the investment's original price.