Suppose you have $100,000 saved in a retirement savings account and $100,000 in a regular savings...
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Suppose you have $100,000 saved in a retirement savings account and $100,000 in a regular savings account. Currently, all your savings are in cash. You would like to invest into the stock market. Based on your risk-preferences, you conclude that you would like to invest 80% of your savings into a broad total market ETF. There are two constraints on your problem: (i) Suppose regulation does not allow you contribute more than $100,000 to your retirement savings account--although your balance can exceed that limit if it your funds grow within that account, e.g. from investment returns (e.g. the Säule 3a in Switzerland has some contribution limit). (ii) You have to pay a tax of 0.15% on each dollar of your retirement savings outside the retirement savings account, and a reduced tax of 0.1% on each dollar of your savings inside the retirement savings account. a) [4 points] How do you optimally change your holdings of cash and stocks across the two accounts so your net wealth will be highest? That is, in which account will you have how much exposure? Explain your reasoning precisely. b) [2 points] How would you expect regular people to adjust their holdings across the accounts? What study informs your expectations? (Refer to the exact study or to the slide in which that study is covered, as well as the specific heuristic.) Suppose you have $100,000 saved in a retirement savings account and $100,000 in a regular savings account. Currently, all your savings are in cash. You would like to invest into the stock market. Based on your risk-preferences, you conclude that you would like to invest 80% of your savings into a broad total market ETF. There are two constraints on your problem: (i) Suppose regulation does not allow you contribute more than $100,000 to your retirement savings account--although your balance can exceed that limit if it your funds grow within that account, e.g. from investment returns (e.g. the Säule 3a in Switzerland has some contribution limit). (ii) You have to pay a tax of 0.15% on each dollar of your retirement savings outside the retirement savings account, and a reduced tax of 0.1% on each dollar of your savings inside the retirement savings account. a) [4 points] How do you optimally change your holdings of cash and stocks across the two accounts so your net wealth will be highest? That is, in which account will you have how much exposure? Explain your reasoning precisely. b) [2 points] How would you expect regular people to adjust their holdings across the accounts? What study informs your expectations? (Refer to the exact study or to the slide in which that study is covered, as well as the specific heuristic.)
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a To optimize your holdings of cash and stocks across the two accounts you should first invest as mu... View the full answer
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