John Is Planning Ahead for Retirement in a Two-Period World

question 506

Multiple Choice

John is planning ahead for retirement in a two-period world. When John is young he will earn $1 million, and when John is old and retired he will be given $50,000 from Social Security. If the interest rate between the two time periods is 7 percent, what is the slope of John's budget constraint when considering the consumption possibilities between the two periods if consumption when young is graphed on the horizontal axis and consumption when old is graphed on the vertical axis?

• A)-0.89
• B)-1.05
• C)-1.07
• D)-1.12

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Definitions:

Unsystematic Risk

The danger linked to a particular corporation or sector that can be minimized by spreading investments.

Systematic Risk

The inherent risk associated with the entire market or market segment, also known as market risk.

Beta Coefficient

A means of gauging the rate of fluctuation, or uniform risk, inherent in a security or portfolio as compared to the entire market.

Treynor Index

A performance metric for determining how well an investment portfolio is compensated for taking investment risk, adjusted for market volatility.