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

question 27

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

---

Definitions:

Expiration

The end of an agreement or period, after which it is no longer valid or in effect.

S&P 100 Index

An American stock market index consisting of 100 large, widely held companies across multiple industries in the United States.

Exercise Price

The fixed price at which the holder of an option can buy (in the case of a call) or sell (in the case of a put) the underlying asset.

Option

A financial derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date.