Introduction to management science Draw the tree Q2. Investment advisors estimat

Question

Introduction to management science
Draw the tree
Q2. 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 Declining Stable Improving 24 23 10 Computers Financial Manufacturing Pharmaceuticals 21 6 A. Assume that an individual investor wants to select one market segment for a new investment. A forecast shows stable 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, and 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 based on these new probabilities? What is the expected return percentage?

Explanation / Answer

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A Market Segment Declining (0.3) Stable (0.5) Improving (0.2) EV Computers 24 2 10 10.2 Financial 23 5 8 11 Manufacturing 22 4 6 9.8 Pharmaceuticals 21 5 6 10 Preferred Method Computers Exp Ret 10.2 B Market Segment Declining (0.2) Stable (0.4) Improving (0.4) EV Computers 24 2 10 9.6 Financial 23 5 8 9.8 Manufacturing 22 4 6 8.4 Pharmaceuticals 21 5 6 8.6 Preferred Method Financial Exp Ret 9.8

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