Question

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 one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor?

ComputersFinancial     ManufacturingPharmaceuticals

What is the expected return percentage of the preferred market segment?

%

(b)

At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities?

ComputersFinancial     ManufacturingPharmaceuticals

What is the expected return percentage of the preferred market segment?

%

Answer 1

(a):

Expected return in COmputers = (9*0.2) + (3*0.5) - (4* 0.3) = 2.1%

Expected return in Financials = (8 * 0.2) + (4 * 0.5) - (3 * 0.3) = 2.7%

Expected return in Manufacturing = (5 * 0.2) + (5*0.5) - (2*0.3) = 2.9%

Expected return in Pharmaceuticals = (5*0.2) + (4*0,5) - (1*0.3) = 2.7%

So From this four returns we can say that Maximum return in Pharmaceuticals. He must invest in Pharma ceuticals and its expected return of percentage is 2.9%

(b):

Expected return in COmputers = (9*0.4) + (3*0.4) - (4* 0.2) = 4%

Expected return in Financials = (8 * 0.4) + (4 * 0.4) - (3 * 0.2) = 4.2%

Expected return in Manufacturing = (5 * 0.4) + (5*0.4) - (2*0.2) = 3.6 %

Expected return in Pharmaceuticals = (5*0.4) + (4*0,4) - (1*0.2) = 3.4%

So From this four returns we can say that Maximum return in Finance. He must invest in Finance and its expected return of percentage is 4.2%

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