Alex Goh Is 39 Years Old and Has Accumulated $128,000

question 34

Multiple Choice

Alex Goh is 39 years old and has accumulated $128,000 in his self directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 62 and figures he will live to age 86. 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 11% and has a standard deviation of 37%. Alex now has 25% of his money in the risk free investment and 75% 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. How much does Alex currently have in the safe account; how much in the risky account?

• A) $31,200; $46,800
• B) $39,000; $39,000
• C) $32,000; $96,000
• D) $45,300; $32,700
• E) $64,000; $14,000

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Definitions:

Behavioral Economics

A field of study that applies psychological insights into human behavior to explain economic decision-making.

Behavioral Economists

Economists who study the effects of psychological, cognitive, emotional, cultural, and social factors on the economic decisions of individuals and institutions.

Temptation

The desire to do something, often something wrong or unwise, driven by impulse or short-term gratification.

Neoclassical Economist

An economist who studies the determination of prices, outputs, and income distributions in markets through supply and demand.