Question

Which kind of stock would you expect to pay the higher average return: stock in an industry that is very sensitive to economic conditions (such as an automaker) or stock in an industry that is relatively insensitive to economic conditions (such as a water company)? Why?

Answer 1

People invest in stocks to earn higher returns. The return is the money one is eligible to receive on the investment made. But each investment involves an element of risk – the risk is that one may lose some or the entire money one invests. An investment generally offers a balance between risk and return. But as a general rule, higher is the risk; higher are potential returns and vice-versa.

A stock in an industry (say automaker industry) that is very sensitive to economic conditions involves an element of greater risk while a stock in an industry that is relatively insensitive to economic condition involves less degree of risk. As such investment in such industry is bound to give higher returns than an industry (say Water Company) that is relatively insensitive to economic condition.