Investment Advisor- Flaw Reasoning

This topic has expert replies
Master | Next Rank: 500 Posts
Posts: 431
Joined: Sat Jan 10, 2009 9:32 am
Thanked: 16 times
Followed by:1 members

Investment Advisor- Flaw Reasoning

by kanha81 » Wed Jun 10, 2009 1:37 pm
Investment Advisor: It is well-known that investing in mutual funds reduces portfolio risk through diversification. It is also true that past investment performance is often related to future investment prospects. Therefore, to help my clients earn high returns with low risk, I select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

Which of the following statements, if true, would demonstrate a serious flaw in the approach of the Investment Advisor?

A) Managers of many mutual funds that have delivered the highest returns over the past several years have already used up their best investment ideas and are unlikely to sustain this level of performance in the future.

B) Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable for every investor.

C) Many individual investors choose to manage their own portfolios rather than consult an investment advisor.

D) The funds that have had the strongest past performance tend to continue to outperform other funds with similar objectives for many years in the future.

E) The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.
Want to Beat GMAT.
Always do what you're afraid to do. Whoooop GMAT

Senior | Next Rank: 100 Posts
Posts: 78
Joined: Mon Aug 11, 2008 8:44 am
Thanked: 3 times
GMAT Score:690

by Arsene Lupin » Wed Jun 10, 2009 2:06 pm
I'd go with A.

It is the only one that weakens the conclusion (The high returns part).

B- He said he would select what suits him. So this is irrelevant.

C- Irrelevant.

D- Strengthen.

E- Irrelevant.

Master | Next Rank: 500 Posts
Posts: 154
Joined: Thu Mar 19, 2009 12:55 pm
Thanked: 5 times
Followed by:1 members

Re: Investment Advisor- Flaw Reasoning

by vinaynp » Wed Jun 10, 2009 3:05 pm
kanha81 wrote:Investment Advisor: It is well-known that investing in mutual funds reduces portfolio risk through diversification. It is also true that past investment performance is often related to future investment prospects. Therefore, to help my clients earn high returns with low risk, I select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

Which of the following statements, if true, would demonstrate a serious flaw in the approach of the Investment Advisor?

A) Managers of many mutual funds that have delivered the highest returns over the past several years have already used up their best investment ideas and are unlikely to sustain this level of performance in the future.

B) Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable for every investor.

C) Many individual investors choose to manage their own portfolios rather than consult an investment advisor.

D) The funds that have had the strongest past performance tend to continue to outperform other funds with similar objectives for many years in the future.

E) The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.
IMO A) by POE

D) Strengthens.
C), E) Out of scope.
B) select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

The investment manager is not selecting a single fund for every investor.

A) Past performance will not be repeated in the future. Hence, the correct answer.

User avatar
Master | Next Rank: 500 Posts
Posts: 154
Joined: Mon Jun 08, 2009 10:02 pm
Thanked: 5 times
Followed by:3 members

by turbo jet » Wed Jun 10, 2009 11:18 pm
IMO: A because it clearly weakens my premise that future performance depends on past performance

B: Was a close answer choice though. I eliminated it on the ground that it strengthens the manager's approach. Since a single fund is not suitable, he offers a fund based on obj and performance.

More thoughts on why B is eliminated welcome!!!

C:Neutral
D:Strengthens
E:Neutral/ Out of scope

Cheers!!!
Turbo Jet!!!

:) :)
Life is Tom; I am Jerry ;)

Legendary Member
Posts: 876
Joined: Thu Apr 10, 2008 8:14 am
Thanked: 13 times

by ketkoag » Thu Jun 11, 2009 5:28 am
I'm not sure about A, E seems good to me..coz A says things about other managers not about this advisor.. E tells that the approach affects the clients so there is something wrong in it thus pointing a flaw in advisor approach..
hence E

Newbie | Next Rank: 10 Posts
Posts: 5
Joined: Tue Jun 02, 2009 11:07 am
Location: MD

by MREC » Thu Jun 11, 2009 9:16 am
OA plz....

Master | Next Rank: 500 Posts
Posts: 399
Joined: Wed Apr 15, 2009 3:48 am
Location: india
Thanked: 39 times

by xcusemeplz2009 » Thu Jun 11, 2009 9:48 am
IMO E

Master | Next Rank: 500 Posts
Posts: 431
Joined: Sat Jan 10, 2009 9:32 am
Thanked: 16 times
Followed by:1 members

by kanha81 » Thu Jun 11, 2009 12:31 pm
ketkoag wrote:I'm not sure about A, E seems good to me..coz A says things about other managers not about this advisor.. E tells that the approach affects the clients so there is something wrong in it thus pointing a flaw in advisor approach..
hence E
You, like me, went too far with this one. Let's just not over-analyze things!

OA is [spoiler][A][/spoiler]
Want to Beat GMAT.
Always do what you're afraid to do. Whoooop GMAT

User avatar
Master | Next Rank: 500 Posts
Posts: 385
Joined: Sun May 24, 2009 3:55 pm
Thanked: 11 times
GMAT Score:740

by Domnu » Thu Jun 11, 2009 2:27 pm
turbo jet wrote:IMO: A because it clearly weakens my premise that future performance depends on past performance

B: Was a close answer choice though. I eliminated it on the ground that it strengthens the manager's approach. Since a single fund is not suitable, he offers a fund based on obj and performance.

More thoughts on why B is eliminated welcome!!!

C:Neutral
D:Strengthens
E:Neutral/ Out of scope

Cheers!!!
Turbo Jet!!!

:) :)
The investment advisor states that he will match possible clients with investment funds of their respective interests; there is no mention of a single fund being assigned to everybody, so answer B cannot be correct.
Have you wondered how you could have found such a treasure? -T

Master | Next Rank: 500 Posts
Posts: 100
Joined: Tue Aug 05, 2014 11:14 am

by Brad.C » Sun May 15, 2016 1:57 pm
It seems to me that the right answer is A.