Paulina Lesky is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Paulina thinks she will retire at age 63 and figures she will live to age 90. The plan allows for two types of investments. One offers a 3% risk-free real rate of return. The other offers an expected return of 12% and has a standard deviation of 39%. Paulina now has 20% of her money in the risk-free investment and 80% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Paulina and by her employer on her behalf, how much will Paulina put into the safe account each year; how much into the risky account?
A) $1,500; $2,500
B) $1,200; $1,800
C) $800; $3,200
D) $1,250; $2,750
E) $1,400; $1,600

Question

Quizplus · Accepted Answer

Paulina and her employer together contribute $4,000 annually ($2,000 each). With 20% going into the safe account, that's $800 (20% of $4,000). Consequently, 80% goes into the risky account, which is $3,200 (80% of $4,000).

Paulina Lesky Is 27 Years Old and Has Accumulated $7,500