Question

In: Statistics and Probability

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....


Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows:

Economic Condition
Market Segment Improving Stable Declining
Computers 10 2 -4
Financial 8 5 -3
Manufacturing 6 4 -2
Pharmaceuticals 6 5 -1
(a) Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving 0.5, stable 0.2, and declining 0.3. What is the preferred market segment for the investor?
- Select your answer -ComputersFinancialsManufacturingPharmaceuticalsItem 1
What is the expected return percentage? Round your answer in one decimal place.
Expected Return = %
(b) At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving 0.2, stable 0.5, and declining 0.3. What is the preferred market segment for the investor based on these new probabilities?
- Select your answer -ComputersFinancialsManufacturingPharmaceuticalsItem 3
What is the expected return percentage? Round your answer in one decimal place.
Expected Return = %

Solutions

Expert Solution

(a)

Expected return percentage for Computers = 0.5 * 10 + 0.2 * 2 + 0.3 * (-4) = 4.2

Expected return percentage for Financials = 0.5 * 8 + 0.2 * 5 + 0.3 * (-3) = 4.1

Expected return percentage for Manufacturing = 0.5 * 6 + 0.2 * 4 + 0.3 * (-2) = 3.2

Expected return percentage for Pharmaceuticals = 0.5 * 6 + 0.2 * 5 + 0.3 * (-1) = 3.7

The maximum expected return percentage is for Computers. Thus, preferred market segment for the investor is Computers.

Expected Return = 4.2 %

(b)

Expected return percentage for Computers = 0.2 * 10 + 0.5 * 2 + 0.3 * (-4) = 1.8

Expected return percentage for Financials = 0.2 * 8 + 0.5 * 5 + 0.3 * (-3) = 3.2

Expected return percentage for Manufacturing = 0.2 * 6 + 0.5 * 4 + 0.3 * (-2) = 2.6

Expected return percentage for Pharmaceuticals = 0.2 * 6 + 0.5 * 5 + 0.3 * (-1) = 3.4

The maximum expected return percentage is for Pharmaceuticals. Thus, preferred market segment for the investor is Pharmaceuticals.

Expected Return = 3.4 %


Related Solutions

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows. Economic Condition Market Segment Improving Stable Declining Computers 9 3 −4 Financial 8 4 −3 Manufacturing 5 5 −2 Pharmaceuticals 5 4 −1 (a) Assume that an individual investor wants to select...
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 6 4 -2 Pharmaceuticals 6 5 -1 a. Assume that an individual investor wants to select...
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 8 4 -2 Pharmaceuticals 6 5 -1 (a) Assume that an individual investor wants to select...
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....
Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 6 4 -2 Pharmaceuticals 6 5 -1 (a) Assume that an individual investor wants to select...
WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in...
WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in Stock B). They claim the investment will reduce risk through diversification, but they need proof. This is the historical returns for the two stocks. Year Returns (%) Stock A Stock B 2012 15.47 % 13.36 % 2013 16.50 15.20 2014 12.09 7.31 2015 10.45 10.01 2016 10.80 5.71 a. Using a 40/60 split, what is the weighted average standard deviation of the two stocks?...
WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in...
WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in Stock B). They claim the investment will reduce risk through diversification, but they need proof. This is the historical returns for the two stocks. Year Returns (%) Stock A Stock B 2012 14.82 % 10.76 % 2013 15.72 11.82 2014 12.61 10.43 2015 10.84 11.96 2016 11.32 7.66 a. Using a 40/60 split, what is the weighted average standard deviation of the two stocks?...
Financial analysts have estimated the returns on shares of Drucker Corporation and the overall market portfolio...
Financial analysts have estimated the returns on shares of Drucker Corporation and the overall market portfolio under various economic conditions as follows. The return for Drucker in the following three economic states of nature are forecasted to be: -15% in recession, +9% in moderate growth, and +30% in a boom. Estimates for the market as a whole in the same economic states are -8% in recession, +10% in moderate growth, and +23% in boom. The analyst considers each state to...
The possible outcomes for the returns on Stock X and the returns on the market portfolio...
The possible outcomes for the returns on Stock X and the returns on the market portfolio have been estimated as follows: Scenario Stock X Market Portfolio 1 -3% 6% 2 14% 12% 3 22% 18% A) 2.1 B) 0.7 C) 1.0 D) none of the above
The possible outcomes for the returns on Stock X and the returns on the market portfolio...
The possible outcomes for the returns on Stock X and the returns on the market portfolio have been estimated as follows: Scenario Stock X Market portfolio 1 -3% 6% 2 14% 12% 3 22% 18% Calculate the market beta for Stock X. Round your answer to the nearest tenth. A) 2.1 B) 0.7 C) 1.0 D) none of the above
The possible outcomes for the returns on Stock X and the returns on the market portfolio...
The possible outcomes for the returns on Stock X and the returns on the market portfolio have been estimated as follows:                                                                                       Scenario          Stock X             Market portfolio                                                          1                      9%                   10%                                                      2                      21%                 13%                                                      3                      13%                 11%                    Each scenario is considered to be equally likely to occur. Calculate the covariance of the returns of Stock X and the market portfolio. A) 0.03% B) 0.57% C) 1.62%                                                          D) 0.06%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT