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Investment Strategy Assignment
Question: Based on the expected return, would you rather invest your money in the stock market or in gold? Why?
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Solution:
It would be better to review the expected return values to understand which would be a better investment when the question arises as to whether invest in gold or the stock market.
To decide on the investment strategy, we will be using the weighted average formula to get the expected returns
Expected return = W1*X1 + W2 * X2 + W3 * X3 + W4 * X4 .............Wn * Xn
Where,
W = Probability
X = expected return for given probability
n = number of state of economy
E = expected return
• The expected return on investing in the Stock Market is: E (Stock market)= 0.15*25% +0.35*20% +0.25*5% +0.25*(-14%)
= 0.040+ 0.070 + 0.013 + (-0.035)
= 0.085
Em = 8.5%
• The expected return on investing in the Gold is: E (Gold) = 0.15* (-30%) + 0.35 * (-9%) + 0.25 * 35% + 0.25 * 50%
= (-0.045) + (-0.032) + 0.088 + 0.125
= 0.136
Eg = 13.6 %
Since the expected return on gold is greater than expected return on stock market, thus investing in gold yields higher returns than investing in market. In the given state of economic situations, the Weak growth and No Growth economic situations comprise half of the total economic state. In these two scenarios, gold is expected to return +35% and +50% respectively. This expected return is notably higher than the expected return of the stock market in the two good economic states i.eBoom economy and Moderate Growth economy. Thus, gold is undoubtedly a better investment.So, it is highly preferable to invest in gold.
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