a. If the two women’s funds earn the same returns in the future as in the past, how old will each be when she becomes a millionaire? b. How large would Erika’s annual contributions have to be for her to become millionaire at the same age as Kitty, assuming their expected returns are realized? c. Is it rational or irrational for Erika to invest in the bond fund rather than in stocks?
Erika and Kitty, who are twins, just received $30,000 each for their 20th birthday. They
both have aspirations to become millionaires. Each plans to make a $5,000 annual
contribution to her “early retirement fund” on her birthday, beginning a year from today.
Erika opened an account with the Safety First Bond Fund, a mutual fund that invests in
high-quality bonds whose investors have earned 7% per year in the past. Kitty invested
in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and
whose investors have earned an average of 20% per year in the fund’s relatively short
history.
a. If the two women’s funds earn the same returns in the future as in the past,
how old will each be when she becomes a millionaire?
b. How large would Erika’s annual contributions have to be for her to become
millionaire at the same age as Kitty, assuming their expected returns are
realized?
c. Is it rational or irrational for Erika to invest in the bond fund rather than in
stocks?
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