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# Many managers of mutual funds proclaim that they have been

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Senior Manager
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Many managers of mutual funds proclaim that they have been [#permalink]

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03 Oct 2009, 11:21
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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
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04 Oct 2009, 10:28
Looks like C

Premise: 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

Result: 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

These are two disconnected statements. If the undervalued company is to generate higher returns, its stock price or share value based on the underlying investments needs to increase
Hence this indicates C

Please let me know the OA and also errors if any in my line of reasoning
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04 Oct 2009, 10:40
hitman4683v1 wrote:
Looks like C

Premise: 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

Result: 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

These are two disconnected statements. If the undervalued company is to generate higher returns, its stock price or share value based on the underlying investments needs to increase
Hence this indicates C

Please let me know the OA and also errors if any in my line of reasoning

No the OA is not C. I will reveal it soon...I am just waiting for some more explanation..
you can give it a try again...
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04 Oct 2009, 10:43
gurpreet07 wrote:
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 - Out of scope.

B) mutual fund managers use insider information, an illegal practice, to generate higher rates of return than the general stock market - Aggressive reasoning. Also there might be some better way than illegal practices. After all, fund managers are more educated and informed about stock market than general public.

C) stock price will rise over time - Out of scope. Statement is not related to the valuation of the stocks

D) given public information alone, companies cannot reliably be labeled undervalued or overvalued relative to to the general stock market - This is BEST possible answer. Fund managers might be more informed about the companies. Or other tools like tech analysis might be necessary in addition to public information, to determine the underlying value of the stock.

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

IMO D. OA?
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04 Oct 2009, 10:47
OA is D...
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06 Jul 2010, 13:16
The stem says - if the efficient capital markets hypothesis is correct - that means we must assume that the valuation of the company (whether undervalued etc) should be treated as correctly done. So in this light D- does not make sense. The only way both the hypothesis can be correct and the fund managers rake in profits is by they buying the shares at low values and the price of the share rising - as in C. Can somebody explain this... I don't know when I will learn CR
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06 Jul 2010, 19:26
marked c ..
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14 Sep 2010, 09:55
Still unsure..I think it should be C
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14 Sep 2010, 20:06
I used exxcesssive POE to arrive at D.

I actually don't grasp what the argument, I'm not good at processing financial news at the moment. Glad that POE is still a good tool.
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15 Sep 2010, 09:56
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gurpreet07 wrote:
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

In questions like this one, we need to understand how the different parts of the passage are related. Here, the linking word is 'however'. That is, the second half of the passage is going to contradict the first part. I think in some of the posts above, people were looking for ways that the second half might support the first, and that is not how the passage is structured.

So the second half of the passage describes an alternative theory that contradicts the fund managers' claim. Noticing that alone might lead you to D, but more specifically, the passage states that by the efficient capital markets hypothesis, 'stock prices accurately reflect the value of underlying investments, incorporating all information available to the public', so according to this hypothesis, stock prices are correctly valued based on public information, and it is thus impossible for a stock to be overvalued or undervalued. That's what D says.
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18 Apr 2011, 23:18
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19 Apr 2011, 06:07
D
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19 Apr 2011, 09:12
By the same logic "B" should be a strong contender too..
As it weakens the fund manager's claim..
ur views??
IanStewart wrote:
gurpreet07 wrote:
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

In questions like this one, we need to understand how the different parts of the passage are related. Here, the linking word is 'however'. That is, the second half of the passage is going to contradict the first part. I think in some of the posts above, people were looking for ways that the second half might support the first, and that is not how the passage is structured.

So the second half of the passage describes an alternative theory that contradicts the fund managers' claim. Noticing that alone might lead you to D, but more specifically, the passage states that by the efficient capital markets hypothesis, 'stock prices accurately reflect the value of underlying investments, incorporating all information available to the public', so according to this hypothesis, stock prices are correctly valued based on public information, and it is thus impossible for a stock to be overvalued or undervalued. That's what D says.

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19 Apr 2011, 10:41
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vijayahir wrote:
By the same logic "B" should be a strong contender too..
As it weakens the fund manager's claim..
ur views??

Unfortunately in the original post, the actual *question* wasn't even included, which makes it a bit difficult to evaluate. I've assumed it's asking for the answer which most logically completes the passage. B is too strong. From the passage, we know that Classical Economic Theory says that stock cannot be undervalued. We also know mutual fund managers *claim* to profit by buying stock which is undervalued. But if Classical Economic Theory is true, that only means that the managers are wrong - they might be lying, or they might think they are buying undervalued stock but are actually buying appropriately valued stock and they may have been 'lucky' to make a profit, or they might be involved in insider trading, among many, many possibilities. It is not logical to conclude that they must have been engaged in something as specific as insider trading when there are so many other possible explanations, which makes B the wrong answer here.
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19 Apr 2011, 12:50
Makes sense..
Kudos to u
IanStewart wrote:
vijayahir wrote:
By the same logic "B" should be a strong contender too..
As it weakens the fund manager's claim..
ur views??

Unfortunately in the original post, the actual *question* wasn't even included, which makes it a bit difficult to evaluate. I've assumed it's asking for the answer which most logically completes the passage. B is too strong. From the passage, we know that Classical Economic Theory says that stock cannot be undervalued. We also know mutual fund managers *claim* to profit by buying stock which is undervalued. But if Classical Economic Theory is true, that only means that the managers are wrong - they might be lying, or they might think they are buying undervalued stock but are actually buying appropriately valued stock and they may have been 'lucky' to make a profit, or they might be involved in insider trading, among many, many possibilities. It is not logical to conclude that they must have been engaged in something as specific as insider trading when there are so many other possible explanations, which makes B the wrong answer here.

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19 Apr 2011, 17:57
Only D makes sense, let me explain how.

"Efficient capital markets hypothesis" states that the current price of the stock represents sum total of all public information. For example if a company is expected to make money by introducing an innovative product, its current price already reflects the effect of the news. But, what the hypothesis does not say is whether the company is undervalued or overvalued, i.e. whether the current stock price exceeds sum of future cashflows. This where D comes in, and provides explanation for the gap between hypothesis and the fund managers' claim. No other option comes close.

gurpreet07 wrote:

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

B) mutual fund managers use insider information, an illegal practice, to generate higher rates of return than the general stock market
Absurd, and does not follow from the premises.

C) stock price will rise over time
Absurd, and does not follow from the premises.

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

E) some mutual fund managers are better than others at generating a higher rate of return on investments
Perhaps true, but the statement does not explain anything.
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25 Apr 2011, 03:38
'gap between fund managers claim and hypothesis'. exactly the expression i was looking for .

D meets the requirement, and the rest of the answers do not follow from the premise.
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16 Jun 2011, 02:07
except D rest all options are assuming just a bit too much.
D it is clearly hitting the label on a stock value of a company.
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16 Aug 2011, 13:04
+1 D
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24 Aug 2011, 00:28
IMO D
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Re: Inference based question   [#permalink] 24 Aug 2011, 00:28

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