Question

Given the following two options of investments you keep a good risk bearing capacity. The following table shows the annual returns on two options given to you.

Year 2005 2006 2007 2008 2009

Energy Funds 44.6 19.68 37 -42.87 38.36

Health Care Funds 15.41 10.87 4.43 -18.45 20.96

a) Which of the two options is comparatively better than the other? Why?

b) Do you think that it is wise to invest in the better option out of these two or to step back from investing in either? Why?

Answer 1

a)

	ENERGY FUNDS	HEALTHCARE FUNDS
EXPECTED RETURN	19.354	6.644
RISK	32.193	13.669
RETURN PER UNIT RISK TAKEN=   EXPECTED RETURN/ RISK	0.60118	0.48606

APPARENTLY , HEALTHCARE FUND WITH LOWER RISK (13.669%) IS PREFERABLE TO ENERGY FUNDS WITH HIGHER RISK (32.193%) . BUT IT IS FOUND THAT RETURN PER UNIT RISK TAKEN IS HIGHER FOR ENERGY FUND (0.60118) . THEREFORE , ENERGY FUNDS ARE THE BETTER OPTION.

b) IT IS BEST TO STEP BACK FROM INVESTING,  AS RETURN PER UNIT RISK IS CONSIDERABLY LOW FOR BOTH FUNDS.