Critical Reasoning

Hey all,

Take a shot at this CR. I'll post the OA next Monday.

Investing in emerging market debt has grown increasingly attractive because it offers above-average rates of return. Emerging markets offer investors many opportunities: new markets, new locations for outsourcing, and new possibilities for mergers and acquisitions. However, emerging markets can also be risky. Countries with emerging economies develop unevenly, and therefore the long-term potential of such investments is unpredictable.

The riskiness of investing in emerging markets remains largely unknown. As a result of the strong interest in emerging-market investment, bankers have worked aggressively to create such investment opportunities. To do so, they give borrowers in emerging markets access to debt structures which are more appropriate for borrowers with higher credit ratings, including short-term debt and debt denominated in foreign currency. These debt structures carry with them a high level of risk, but they also enable countries with emerging markets to instill confidence in potential investors and to optimize short-term growth. As a result, they frequently borrow more money than is advisable for the welfare of their citizens and commercial institutions. In a declining economic environment, such borrowing could ultimately hinder future development. Furthermore, many emerging markets suffer from fundamental institutional weaknesses that affect their long-term financial stability. Poorly enforced mechanisms for debt recovery and uncertain political situations make emerging market investments susceptible to sudden economic and political crises. Radical and unexpected changes in market values are therefore common.

Many investors are nonetheless drawn to the potential of emerging markets to yield quick profits. For example, emerging-market portfolio managers, concerned more with short-term returns than long-term viability, have incentives to make investment decisions based only on the latest economic trends. In addition, unseasoned investors may fail to consider the potential problems caused by a market's underlying economic, legal and political conditions. Furthermore, many pension funds and insurance companies, whose knowledge of emerging-market economics is extremely limited, will often invest in emerging markets as they start to gain momentum. Managers of these funds operate under the assumption that high risk debt structures are accurate economic indicators; they fail to realize that the driving force behind these markets' rise is not the stability of their political and economic foundations but global trends toward liquidity.

The passage states that most managers of emerging-market portfolios overlook an emerging market's political conditions because

(A) The most profitable investments require that investors a take on a certain element of risk
(B) Managers are not incentivized to look beyond the immediate profitability of an investment
(C) Underlying economic conditions of emerging markets are more important than political conditions
(D) Managers have no understanding of emerging-market economics
(E) The growth of emerging markets in the short term is not directly affected by political upheaval

What do you think?

(A) The most profitable investments require that investors a take on a certain element of risk.
It is general assumption, but can't be the reason behind overlooking the political conditions.
(B) Managers are not incentivized to look beyond the immediate profitability of an investment
It is correct, as stated in the passage 'they also enable countries with emerging markets to instill confidence in potential investors and to optimize short-term growth'. Last passage also starts with saying,"Many investors are nonetheless drawn to the potential of emerging markets to yield quick profits."
(C) Underlying economic conditions of emerging markets are more important than political conditions
It can be true, but not reason behind why political conditions are overlooked.
(D) Managers have no understanding of emerging-market economics.
Not at all.
(E) The growth of emerging markets in the short term is not directly affected by political upheaval
Not stated about this anywhere.

The passage states that most managers of emerging-market portfolios overlook an emerging market's political conditions because

(A) The most profitable investments require that investors a take on a certain element of risk (not answering the BECAUSE part of the question)

(B) Managers are not incentivized to look beyond the immediate profitability of an investment (supported by: emerging-market portfolio managers, concerned more with short-term returns than long-term viability, have incentives to make investment decisions based only on the latest economic trends. In addition, unseasoned investors may fail to consider the potential problems caused by a market's underlying economic, legal and political conditions.

(C) Underlying economic conditions of emerging markets are more important than political conditions
(Not related to pssg)

(D) Managers have no understanding of emerging-market economics (too strong and broad)

(E) The growth of emerging markets in the short term is not directly affected by political upheaval (Not related to pssg)

IMO B