Investment Advisor: It is well-known that investing in mutual funds re

OFFICIAL EXPLANATION

The strategy of the investment advisor is based on selecting the fund that has delivered the highest returns within the peer group that meets the client’s objectives. One of the major assumptions underlying this strategy is that the funds that have delivered the best returns will continue to do so in the future. If this assumption is inaccurate, the strategy of the investment advisor will be seriously weakened.

(A) CORRECT. This answer choice demonstrates a serious flaw in the logic of the investment advisor. If it is true that the best-performing fund managers have already used their strongest ideas and are unlikely to sustain this level of performance in the future, then the advisor’s winner-oriented strategy is unlikely to deliver high returns.

(B) Since the investment advisor selects the fund from the group that meets the client’s objectives, this statement does not weaken the advisor’s strategy.

(C) Since the advisor’s strategy is oriented only towards her clients rather than the public in general, the fact that many investors choose to manage their own portfolios is outside the scope of the argument.

(D) This statement, if true, would support rather than weaken the advisor’s strategy. If the funds with strongest past performance continue to outperform others, the advisor’s strategy is likely to yield high future returns.

(E) Since this answer choice does not provide any specific reason for the decline in the advisor’s clientele, it is not relevant to the effectiveness of the advisor’s strategy. This decline could have occurred for a variety of reasons unrelated to investment returns. For example, the decline in the clientele could have resulted from the fact that the advisor moved from a larger metropolitan area to a smaller town with fewer active investors.