Genny Webb Is 27 Years Old and Has Accumulated $7,500

question 46

Multiple Choice

Genny Webb is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan.Each year she contributes $2,000 to the plan, and her employer contributes an equal amount.Genny thinks she will retire at age 63 and figures she will live to age 90.The plan allows for two types of investments.One offers a 3% risk-free real rate of return.The other offers an expected return of 12% and has a standard deviation of 39%.Genny now has 20% of her money in the risk-free investment and 80% 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 Genny expect to have in her risky account at retirement?

• A)$1,800,326
• B)$1,905,095
• C)$1,743,781
• D)$1,224,651

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Definitions:

Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of holding a risky asset.

Risk Aversion

A person's or entity's reluctance to take risks, preferring lower returns with known risks over higher returns with unknown risks.

Total Risk

The complete range of possible risks, including both systematic and unsystematic risks, that can affect the value of an investment.

Portfolio Returns

The gain or loss on an investment portfolio over a period of time, reflecting the overall performance of the investments.