QUESTION 5 Today is your 25th birthday, and you want to save $1.5 Million by you

Question

QUESTION 5

Today is your 25th birthday, and you want to save $1.5 Million by your birthday at age 70. If you expect to earn 7% APR compounded monthly in your retirement account, what constant payment at the end of each month must you deposit into the account through your 70th birthday in order to reach your retirement savings goal on your 70th birthday? (Answer to the nearest penny.)

QUESTION 46

Suppose you are comparing two portfolios of stocks to determine which is more appropriate for all of your investments. Portfolio A contains a large number of stocks, but each stock appears to have a relatively high amount of risk which you believe is unsystematic in nature and a relatively low level of systematic risk. Portfolio B also contains a large number of stocks, however each stock in that portfolio seems to contain a relatively large amount of systematic risk and a low level of unsystematic risk. If both portfolios have the same expected return, which portfolio would most likely be the best choice?

Portfolio A

Portfolio B

There is no information that would indicate that one portfolio is better than the other.

Portfolio A

Portfolio B

There is no information that would indicate that one portfolio is better than the other.

Explanation / Answer

Question No. 5

Let monthly deposit is A ; Monthly rarte of interest (r) = 7%/12 = 0.5833% = 0.0058; n = 45 years = 540 months.

Maturity Value = $1.5 million = $1,500,000;

$1,500,000 = A (1+r)n - 1/ r = A x (1.0058) - 1/0.0058

                   = A x 22.713 - 1/0.0058

                   = A x 21.7133/0.0058

                   = A x 3743.67

               A = 1,500,000/3743.67

                  = $400.68. Monthly deposit to be made to get $1,500,000 on 70th birthday

Question 46

We can select Portfolio A as it contains large number of stocks having relatively high amount of unsystematic risk and relatiively low level of systematic risk. But Portfolio B consists of large number of stocks having relatively large amount of systmatic risk. we can reduce unsystematic risk by diversifying the investment,but we can not reduce systematic risk as it is not in our control and also it is due to reasons beyond our control.

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