Critical Reasoning

Many managers of mutual funds proclaim that they have been able to generate consistently higher rates of return on their investments than the general stock market bu buying shares of undervalued companies. Classical economic theory, however, proposes the "efficient capital markets hypothesis", which proposes that stock prices accurately reflect the value of the underlying investments, incorporating all information available to the public. if the efficient capital markets hypothesis is correct, then it should be expected that_____________.

A) mutual fund managers, in order to compete with each other, will bid up the prices of certain stocks beyond their true values

B) mutual fund managers use insider information, an illegal practice, to generate higher rates of return than the general stock market

C) stock price will rise over time

D) given public information alone, companies cannot reliably be labeled undervalued or overvalued relative to to the general stock market

E) some mutual fund managers are better than others at generating a higher rate of return on investments

[spoiler]Whats wrong with B?[/spoiler]

EXPLAIN your answers.

the argument does not suggest that MF mgrs use insider information to generate higher RoI.
However, according to efficient capital markets hypothesis, stock price of a company ----> underlying investments (based on public knowledge).
Here the public (MF mgrs) might proclaim that they are able to generate higher RoIs by buying undervalued stocks. But their proclaimation is based on the information avail to the public.

IMO D

yes, I am confused.

I think this is inference question.

Maybe we can sort out B because fund manager claim is not fact. the claim is not consider correct.

D must be true from evidence. so D is correct.

where this question is from? I do not thing gmat typical question is like this

I'd say C.

Companies are undervalued -> hypothesis states that stock price reflects true value. If the value is low now, but perceived as high, then the stock price must rise according to the hypothesis.

"expected that" - must be the future.

Given that "incorporating all information available to the public the stock prices accurately reflect the value of the underlying investments"

but still the Mutual Fund managers are able to get more rate of return than general stock market, indicates that there is some other information about the companies that people don't know. Which indirectly states that the all the information is not available to the public. Hence IMO D

IMO D

Many managers of mutual funds proclaim that they have been able to generate consistently higher rates of return on their investments than the general stock market bu buying shares of undervalued companies. Classical economic theory, however, proposes the "efficient capital markets hypothesis", which proposes that stock prices accurately reflect the value of the underlying investments, incorporating all information available to the public. if the efficient capital markets hypothesis is correct, then it should be expected that_____________.

The article says that fund managers are beating the market by buying undervalued shares.
However, the efficeint capital market hypothesis says the price of stocks in the market reflects the true value.

If the efficient capital market hypothesis is correct, then we should assume the current price of share is the correct price.

B is not correct because there actually is no direct relationship between using insider information and generating profit by buying undervalued shares.

Let's put it in this way.
I went to casino and somehow made 50% return overnight, and I said I made profit by playing the game where most people lost their money.

According to probability, the chance of winning in casino, let's say, was 49%. Then, can people say that I employed some trick to make profit?

That is one possibility, but also I could have been just lucky.

It's a clear D.

1. Managers make more money by buying undervalued stock,
2. efficient capital markets hypothesis", which proposes that stock prices accurately reflect the value of the underlying investments

Therefore we can conclude that the classical economic theory is not entirely reliable as we know that managers generate more income by buying undervalued stocks.

B is irrelevant to the passage - we don't know whether they are getting insider information or they are too smart. B is also way to extreme as it points out that managers are doing illegal practice.

umaa wrote:
B) mutual fund managers use insider information, an illegal practice, to generate higher rates of return than the general stock market

D) given public information alone, companies cannot reliably be labeled undervalued or overvalued relative to to the general stock market

[spoiler]Whats wrong with B?[/spoiler]

EXPLAIN your answers.

zonda12 wrote:I'd say C.

Companies are undervalued -> hypothesis states that stock price reflects true value. If the value is low now, but perceived as high, then the stock price must rise according to the hypothesis.

"expected that" - must be the future.

Same line of thought here!!!

IMO C

Vikas' reasoning is good.

Choice B is wrong because it might be that mutual fund managers are better able to make use of the known information.

Choice C is wrong because we don't know if the stock price is low now. When more information about a certain stock comes in, it can be information that is unfavorable for that stock, in which case the stock price would go down. Alternatively, choice C does not specify that it is referring to the undervalued stocks that the passage discussed.

I believe the answer should be C