Final answer:
The student's investment allocations between a stock portfolio, bond portfolio, and money market account reflect a balance of expected return and risk, with stocks being the most volatile. Emphasizing early savings taking advantage of compound interest, a $3,000 investment at a 7% return rate can grow significantly over 40 years.
Step-by-step explanation:
The investment choices you've made as you start your first job in the corporate world illustrate a well-known tradeoff between expected return and risk. Bank accounts, having very low risk, provide correspondingly low returns. In comparison, bonds come with a higher degree of risk but offer greater returns. Stocks are the riskiest but also hold the potential for the highest returns. The varying levels of risk are reflected in the investments' beta, with your chosen stock portfolio having a beta of 1, signifying its volatility is on par with the overall market. The bond portfolio's beta is 0.18, indicating much lower volatility relative to the market.
It is also crucial to recognize the importance of starting to save early. Compounding has a powerful effect over time, which underscores why saving money from an early age can significantly enhance the potential value of your investments. For example, saving $3,000 at age 25 with a 7% annual rate of return can grow your investment to $44,923 over 40 years without additional contributions, demonstrating the substantial benefits of compound interest.