In: Statistics and Probability
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:
|
(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 %