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:

Uncertainty

A situation in which there is a lack of complete certainty about future events or outcomes, often leading to variability in performance or decision-making.

Positively Correlated

A relationship between two variables in which they move in the same direction, meaning that as one variable increases, the other also increases, and vice versa.

Negatively Correlated

A relationship between two variables in which one variable increases as the other decreases, and vice versa.

Standard Deviation

A statistical measure indicating the amount of variation or dispersion from the average, commonly used to quantify the uncertainty or risk involved in business processes and performance.