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

question 74

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.
-Of the total amount of new funds that will be invested by Alex and by his employer on his behalf,how much will Alex put into the safe account each year; how much into the risky account?

• A)$2,500, $2,500
• B)$3,200, $1,800
• C)$3,000, $2,000
• D)$1,250, $3,750
• E)$2,400,$2,600

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Definitions:

Expected Total Return

The anticipated return on an investment over a given period, including both capital gains and income from dividends or interest.

Constant

A fixed value in mathematics and physics that does not change, or a situation in finance where certain conditions, like interest rate, remain unchanged over a period.

Expected Dividend

The forecasted dividend payment announced by a company for the upcoming period.

Expected Dividend Yield

The anticipated yield that an investment in stock will return in the form of dividends, expressed as a percentage of the stock's current price.