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 conditions are given in the table:
|
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 investor wants to select one market segment for 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? What is the expected return percentage?
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? What is the expected return percentage?