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stock market volatility

by David@VeritasPrep » Fri Aug 27, 2010 5:08 am
Here is another original, tell me what you think...


"The financial committee is concerned about recent abrupt swings in stock markets. Some of the one day gains and losses have been among the largest in history, and in this era of computerized trading, tremendous changes can occur even within one hour. In order to minimize this volatility across stock exchanges, the financial committee has proposed new regulations to interrupt steep drops at the major stock exchanges. Under this plan the trading of a particular stock will be halted on the major stock exchanges once that stock loses just 20% percent of its value in a period of three hours or less.

Which of the following, if true, most clearly points to the conclusion that the financial committee's plan will not result in less overall volatility in the stock exchanges?

(A) The current curbs on trading at the major stock exchanges are credited with preserving some level of stability as the speed of trading has greatly increased.

(B) Currency trading and commodity futures markets have much more volatility than major stock exchanges.

(C) When trading of a particular stock is halted at the major stock exchanges the value of that stock often plummets at the smaller exchanges that do not have automatic halts on trading.

(D) Some experts speculate that computerized trading programs that react too quickly to small changes in the values of stocks cause the increased volatility that the financial committee is concerned about.

(E) Investors should understand that the stock markets are volatile and investments may gain or lose value very quickly.
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by sirisha.g » Fri Aug 27, 2010 5:14 am
This is a bit difficult. IMO C.
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by debmalya_dutta » Fri Aug 27, 2010 5:57 am
This was a good one David...

I adopted the elimination process and arrived at C

However , I am not able to solidly reason why C is correct.. So , if the smaller stock markets are impacted by the sudden halt and the prices there fall... it still doesn't result in volatility because the fall is predictable. Isn't that so? I thought the main issue why the financial controllers incorporated the plan was to stem the intra day fluctuations in stock prices. So in a way they want to stem the unpredictability of the stock prices..But this option looks like the fall in smaller stock market is predictable
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by David@VeritasPrep » Fri Aug 27, 2010 6:34 am
Deb -

Interesting point....

I will post the explanation a little later, but I am thinking that we are using volatility in a slightly different way. I was thinking of volatility as large swings up or down. Any large swings in the stock markets that are even a bit uncertain seem to indicate volatility. That was my take, but I am not a serious investor and I don't want to require special knowledge of volatility as it relates to the stock marker.

Here is a definition of volatility from Merriam Webster: "characterized by or subject to rapid or unexpected change <a volatile market>."

Anyway that is what I was thinking. What do others think? Should I use a word other than volatile?
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by debmalya_dutta » Fri Aug 27, 2010 6:38 am
I think volatile is good... Maybe my question will be answered when I see the explanations for the various options. And I agree with your usage on volatility... I am , however, having a hard time relating option C to the control of volatile market stock prices
David@VeritasPrep wrote:Deb -

Interesting point....

I will post the explanation a little later, but I am thinking that we are using volatility in a slightly different way. I was thinking of volatility as large swings up or down. Any large swings in the stock markets that are even a bit uncertain seem to indicate volatility. That was my take, but I am not a serious investor and I don't want to require special knowledge of volatility as it relates to the stock marker.

Here is a definition of volatility from Merriam Webster: "characterized by or subject to rapid or unexpected change <a volatile market>."

Anyway that is what I was thinking. What do others think? Should I use a word other than volatile?
@Deb
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by abhigang » Fri Aug 27, 2010 6:46 am
IMO C.

I thought of volatility as fluctuations in the stock market.
Question asks to point out a fact which will in fact weaken the committees' plan.

A is a strengthener.
B & E is irrelevant to the context.
D is a reason which led to the formulation of the plan. Hence it is out.

C states a fact that although fluctuations can be controlled at major stock exchanges , it drops significantly in smaller ones where the plan is not implemented. Hence overall volatility is increased.
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by norizam » Fri Aug 27, 2010 6:46 am
I am generally very bad at interpreting/analyzing CR, so be gentle on me! here's what i think:
(A) The current curbs on trading at the major stock exchanges are credited with preserving some level of stability as the speed of trading has greatly increased.
The current regulation is working somewhat, but the new regulation could be better..or not

(B) Currency trading and commodity futures markets have much more volatility than major stock exchanges.
we are comparing apples and oranges

(C) When trading of a particular stock is halted at the major stock exchanges the value of that stock often plummets at the smaller exchanges that do not have automatic halts on trading.
if the regulation is applied to only the major stock markets, it will not stop the smaller market from continuing trading and the value will continue to fall. So applying the new regulation will not likely to stop the value from going down.

(D) Some experts speculate that computerized trading programs that react too quickly to small changes in the values of stocks cause the increased volatility that the financial committee is concerned about.
we are not concerned with the cause, rather with prevention

(E) Investors should understand that the stock markets are volatile and investments may gain or lose value very quickly.
We are not concerned with investors either


I like the questions on the rose beetles and zone hardiness better., a subject that i know well enough ..since I used to grow roses in (arctic) Canada :D
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by abhigang » Fri Aug 27, 2010 6:48 am
David@VeritasPrep wrote:Deb -

Interesting point....

I will post the explanation a little later, but I am thinking that we are using volatility in a slightly different way. I was thinking of volatility as large swings up or down. Any large swings in the stock markets that are even a bit uncertain seem to indicate volatility. That was my take, but I am not a serious investor and I don't want to require special knowledge of volatility as it relates to the stock marker.

Here is a definition of volatility from Merriam Webster: "characterized by or subject to rapid or unexpected change <a volatile market>."

Anyway that is what I was thinking. What do others think? Should I use a word other than volatile?
David, i think the volatile word is good enough as the definition is also provided in the argument indirectly.
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by reply2spg » Fri Aug 27, 2010 7:00 am
I felt that passage is easy but question stem is bit difficult to understand. 'Volatility' makes more sense to express sudden increase or decreasse in the price of stock. 'Volatile' is a common word to show the market;s movement.

Actually this is weaken question. I will rephrase the question stem as 'Which of the following, if true, will undermine the plan of committee?' - Hope David will not mind this :)

Here is my analysis.

Plan is - halt the trading of the stock on major stock exchanges once that stock loses just 20% percent of its value in a period of three hours or less.

Why - In order to minimize this volatility across stock exchanges. Keep in mind that we have word across stock exchange means in all stock exchanges. This is scope shift.

Purpose is for all stock exchanges and plan is only for major stock exchanges.

(A) The current curbs on trading at the major stock exchanges are credited with preserving some level of stability as the speed of trading has greatly increased. - This has nothing to do with the plan. If this is correct, then there is no use of the plan. Eliminate

(B) Currency trading and commodity futures markets have much more volatility than major stock exchanges. - We are talking about the stocks and not about the Currency trading and commodity futures markets. Eliminate

(C) When trading of a particular stock is halted at the major stock exchanges the value of that stock often plummets at the smaller exchanges that do not have automatic halts on trading. - Aha!!! if plan is just for major stock exchanges then what about the smaller stock exchange. Purpose is for all stock exchanges and plan is only for major stock exchanges. This weakens the plan. What if country has only 1 major stock exchange and 10 small exchanges where in total trading is more than that of in major stock exchange. If that is the case then volatility is more than anticipated.

(D) Some experts speculate that computerized trading programs that react too quickly to small changes in the values of stocks cause the increased volatility that the financial committee is concerned about. - I always eliminate the opinion options in strengthening and weakening questions. However, I read the option carefully. Why I do so, because plan will be implemented or will be proposed. In that case number of people will have their number of opinions. But how does that matter to the implementation? So I eliminated this option.

(E) Investors should understand that the stock markets are volatile and investments may gain or lose value very quickly. - Who said that investors do not understand the volatility of market? Also if investor understands, how will it weaken the plan? Eliminate

David, please let me know whether my method of approaching the question is correct?
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by David@VeritasPrep » Fri Aug 27, 2010 9:41 am
OA is C

"Reply2" you have analyzed this well ("norizam" good job, too). Reply2 You pick out the plan and you emphasize the "why?" - I refer to this as the "goal."

At Veritas we call this a 3P/3S (plan) question in reference to the terms that are commonly used to speak of the plan such as "strategy" and "proposal". For a weaken plan question we want to show some reason why the financial committee's plan may not reach the goal that they have set out.

The goal is stated in the question stem: "to decrease the overall volatility of the stock markets." The plan is found in the stimulus: "to halt trading of a particular stock at the major stock exchanges when that stock loses a certain percentage of value." The correct answer will be indicate that the curbs on trading at the major exchanges will not achieve the goal or less volatility in stock exchanges as a whole.

Answer choice C is the correct answer because it states that if trading of a stock is halted on the major exchanges that very action can cause the value of the stock to plummet on the smaller exchanges. Overall the volatility of the stock markets would not be decreased it would only be moved from one market to another and might even be increased as the very fact that stocks cannot be traded on the larger exchanges could cause investors to re-actively sell that stock or similar stocks on the smaller markets.

Choice A would strengthen the idea of the plan achieving the goal of more stability.
Choice B deals with currency and commodity markets and therefore is beyond the scope of this question.
Choice D seeks to explain the underlying cause of the volatility but does not comment on the ability of the plan to decrease the volatility.
Choice E is a general statement about the markets and does not focus on this particular plan.
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by reply2spg » Fri Aug 27, 2010 9:47 am
Thanks David, what would be the level of this question?
David@VeritasPrep wrote:OA is C

"Reply2" you have analyzed this well ("norizam" good job, too). Reply2 You pick out the plan and you emphasize the "why?" - I refer to this as the "goal."

At Veritas we call this a 3P/3S (plan) question in reference to the terms that are commonly used to speak of the plan such as "strategy" and "proposal". For a weaken plan question we want to show some reason why the financial committee's plan may not reach the goal that they have set out.

The goal is stated in the question stem: "to decrease the overall volatility of the stock markets." The plan is found in the stimulus: "to halt trading of a particular stock at the major stock exchanges when that stock loses a certain percentage of value." The correct answer will be indicate that the curbs on trading at the major exchanges will not achieve the goal or less volatility in stock exchanges as a whole.

Answer choice C is the correct answer because it states that if trading of a stock is halted on the major exchanges that very action can cause the value of the stock to plummet on the smaller exchanges. Overall the volatility of the stock markets would not be decreased it would only be moved from one market to another and might even be increased as the very fact that stocks cannot be traded on the larger exchanges could cause investors to re-actively sell that stock or similar stocks on the smaller markets.

Choice A would strengthen the idea of the plan achieving the goal of more stability.
Choice B deals with currency and commodity markets and therefore is beyond the scope of this question.
Choice D seeks to explain the underlying cause of the volatility but does not comment on the ability of the plan to decrease the volatility.
Choice E is a general statement about the markets and does not focus on this particular plan.
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by diebeatsthegmat » Sat Aug 28, 2010 1:33 am
David@VeritasPrep wrote:OA is C

"Reply2" you have analyzed this well ("norizam" good job, too). Reply2 You pick out the plan and you emphasize the "why?" - I refer to this as the "goal."

At Veritas we call this a 3P/3S (plan) question in reference to the terms that are commonly used to speak of the plan such as "strategy" and "proposal". For a weaken plan question we want to show some reason why the financial committee's plan may not reach the goal that they have set out.

The goal is stated in the question stem: "to decrease the overall volatility of the stock markets." The plan is found in the stimulus: "to halt trading of a particular stock at the major stock exchanges when that stock loses a certain percentage of value." The correct answer will be indicate that the curbs on trading at the major exchanges will not achieve the goal or less volatility in stock exchanges as a whole.

Answer choice C is the correct answer because it states that if trading of a stock is halted on the major exchanges that very action can cause the value of the stock to plummet on the smaller exchanges. Overall the volatility of the stock markets would not be decreased it would only be moved from one market to another and might even be increased as the very fact that stocks cannot be traded on the larger exchanges could cause investors to re-actively sell that stock or similar stocks on the smaller markets.

Choice A would strengthen the idea of the plan achieving the goal of more stability.
Choice B deals with currency and commodity markets and therefore is beyond the scope of this question.
Choice D seeks to explain the underlying cause of the volatility but does not comment on the ability of the plan to decrease the volatility.
Choice E is a general statement about the markets and does not focus on this particular plan.
Davis, this CR is really nice.... your questions are always nice to practice...
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by norizam » Mon Aug 30, 2010 3:18 am
With 1.5 min at hand, i really don't have time to analyze what "volatile" really means; I thought it had something to do with fluctuation or wild swing of stock price. That aside, I found that "weaken the conclusion" is a little easier to handle than "weaken the argument" or "weaken the premise" (if there is such a thing). My weakness comes from not knowing how to establish links/connections when there is seemingly no apparent connection between the arguments and any of the answers? (such as in the question about the climate in Provence). So, I hope to see more questions of similar lines to help improve my reasoning. Thanks
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