Alex Moore Is 43 Years Old and Has Accumulated $78,000

question 13

Multiple Choice

Alex Moore is 43 years old and has accumulated $78,000 in his self-directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alex now has 40% of his money in the risk-free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Alex and by his employer on his behalf, how much will he put into the safe account each year; how much into the risky account?

• A) $1,500; $1,500
• B) $1,200; $1,800
• C) $2,000; $1,000
• D) $2,500; $500
• E) $1,400; $1,600

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Definitions:

Authorized Stock

Authorized stock is the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation.

Issued Stock

The total number of shares that a company has sold to investors and are currently outstanding.

Outstanding Stock

The number of shares that have been issued by a company and are held by investors, including both public shareholders and company insiders or officers.

Common Stock

A form of corporate equity ownership, a type of security representing a claim on part of the company's assets and earnings.