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19 Feb 2024, 02:15
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Difficulty:
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Question Stats:
55% (02:33) correct
45%
(02:42)
wrong
based on 1078
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Economist: On average, returns are higher on stocks than on bonds, as one would expect: higher average returns are a necessary incentive for investors to accept the greater risks of loss that come with stock investments. However, the average difference in returns between stocks and bonds is even greater than one would expect based on risk alone. Financial planners may be responsible. Their pay depends mainly on avoiding losses for their clients, which encourages them to recommend safe investments with low returns. This increased demand for bonds increases their price and hence decreases their potential return.
Which of the following is an assumption the economist’s argument requires?
A. At least some financial planners recommend that at least some of their clients invest only in bonds.
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond.
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients.
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify.
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns.
Which of the following is an assumption the economist’s argument requires?
A. At least some financial planners recommend that at least some of their clients invest only in bonds.
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond.
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients.
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify.
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns.
20 Feb 2024, 21:59
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Economist: On average, returns are higher on stocks than on bonds, as one would expect: higher average returns are a necessary incentive for investors to accept the greater risks of loss that come with stock investments. However, the average difference in returns between stocks and bonds is even greater than one would expect based on risk alone. Financial planners may be responsible. Their pay depends mainly on avoiding losses for their clients, which encourages them to recommend safe investments with low returns. This increased demand for bonds increases their price and hence decreases their potential return.
The economist concludes the following:
Financial planners may be responsible (for causing the phenomenon that the average difference in returns between stocks and bonds is even greater than one would expect based on risk alone).
The support for that conclusion is the following:
Their pay depends mainly on avoiding losses for their clients, which encourages them to recommend safe investments with low returns. This increased demand for bonds increases their price and hence decreases their potential return.
Which of the following is an assumption the economist’s argument requires?
The correct answer must be something the economist has assumed in going from the evidence about financial planners recommending safe investments to the conclusion about financial planners possibly being responsible for the larger than expected difference between the returns on stocks and bonds.
A. At least some financial planners recommend that at least some of their clients invest only in bonds.
The support for the conclusion does not depend on any financial planners recommending that their clients invest only in bonds. As long as they gravitate toward recommending bonds and recommend them more than they would if they were not emphasizing avoiding losses, the argument works.
Eliminate.
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond.
The passage states as fact that the "average" difference between stock and bond returns is greater than would be expected.
This information about what is justified with regard to investing in "a specific stock" is not necessary for the argument to work since it is not necessary to support a fact with an assumption.
Also, the author's general statement about the overall "average" difference would not be supported by this statement about a specific stock in any case.
Eliminate.
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients.
Honestly, I don't consider this choice an assumption. The author states as fact that "This increased demand for bonds increases their price and hence decreases their potential return."
If financial planners are gravitating toward recommending bonds because they are risk averse and thus are causing the difference between stock and bond returns to be greater than expected, then we can infer that, as this choice says, "On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients." After all, if they are unduly bidding up bonds, then they are also unduly staying away from stocks.
So, I think this choice is more of an inference based on what the passage says than an assumption.
Also, we don't need to assume this choice for the argument to work. After all, if financial planners are indeed playing it safe and recommending bonds to their clients and thus causing extra demand for bonds, then it follows that they are responsible for the greater than expected difference between the returns on bonds and the returns on stocks, regardless of whether anything is assumed about stocks.
In other words, we need only the statements about bonds for the argument to work. We don't need to assume anything about stocks. After all, the fact that there is extra demand for bonds could alone explain the greater than expected difference between bond returns and stock returns.
At the same time, none of the other choices work, and it's true that, for the statements in the passage to be true, this choice must be true as well. In other words, while this choice is not a necessary assumption, it does fit the scenario in such a way that if it's not true, then the conclusion cannot be correct. After all, if something that can be inferred from the statements in the passage is not true, then those statements cannot be true either.
So, we have to roll with this choice as the correct answer even though the argument works even if this choice is not assumed.
Keep
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify.
This choice is contrary to what the passage says.
After all, the conclusion of the argument and the support for the conclusion are basically an explanation for why bond returns are even lower relative to stock returns than would be expected, not greater than is justified.
Eliminate.
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns.
The point of the argument is basically that financial planners make the difference between bond returns and stock returns greater than expected by avoiding losing money for clients by recommending bonds.
We can see that, to argue that point, it is certainly not necessary to assume that financial planners recommend stocks.
Eliminate.
Correct answer: C
The economist concludes the following:
Financial planners may be responsible (for causing the phenomenon that the average difference in returns between stocks and bonds is even greater than one would expect based on risk alone).
The support for that conclusion is the following:
Their pay depends mainly on avoiding losses for their clients, which encourages them to recommend safe investments with low returns. This increased demand for bonds increases their price and hence decreases their potential return.
Which of the following is an assumption the economist’s argument requires?
The correct answer must be something the economist has assumed in going from the evidence about financial planners recommending safe investments to the conclusion about financial planners possibly being responsible for the larger than expected difference between the returns on stocks and bonds.
A. At least some financial planners recommend that at least some of their clients invest only in bonds.
The support for the conclusion does not depend on any financial planners recommending that their clients invest only in bonds. As long as they gravitate toward recommending bonds and recommend them more than they would if they were not emphasizing avoiding losses, the argument works.
Eliminate.
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond.
The passage states as fact that the "average" difference between stock and bond returns is greater than would be expected.
This information about what is justified with regard to investing in "a specific stock" is not necessary for the argument to work since it is not necessary to support a fact with an assumption.
Also, the author's general statement about the overall "average" difference would not be supported by this statement about a specific stock in any case.
Eliminate.
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients.
Honestly, I don't consider this choice an assumption. The author states as fact that "This increased demand for bonds increases their price and hence decreases their potential return."
If financial planners are gravitating toward recommending bonds because they are risk averse and thus are causing the difference between stock and bond returns to be greater than expected, then we can infer that, as this choice says, "On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients." After all, if they are unduly bidding up bonds, then they are also unduly staying away from stocks.
So, I think this choice is more of an inference based on what the passage says than an assumption.
Also, we don't need to assume this choice for the argument to work. After all, if financial planners are indeed playing it safe and recommending bonds to their clients and thus causing extra demand for bonds, then it follows that they are responsible for the greater than expected difference between the returns on bonds and the returns on stocks, regardless of whether anything is assumed about stocks.
In other words, we need only the statements about bonds for the argument to work. We don't need to assume anything about stocks. After all, the fact that there is extra demand for bonds could alone explain the greater than expected difference between bond returns and stock returns.
At the same time, none of the other choices work, and it's true that, for the statements in the passage to be true, this choice must be true as well. In other words, while this choice is not a necessary assumption, it does fit the scenario in such a way that if it's not true, then the conclusion cannot be correct. After all, if something that can be inferred from the statements in the passage is not true, then those statements cannot be true either.
So, we have to roll with this choice as the correct answer even though the argument works even if this choice is not assumed.
Keep
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify.
This choice is contrary to what the passage says.
After all, the conclusion of the argument and the support for the conclusion are basically an explanation for why bond returns are even lower relative to stock returns than would be expected, not greater than is justified.
Eliminate.
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns.
The point of the argument is basically that financial planners make the difference between bond returns and stock returns greater than expected by avoiding losing money for clients by recommending bonds.
We can see that, to argue that point, it is certainly not necessary to assume that financial planners recommend stocks.
Eliminate.
Correct answer: C
General Discussion
20 Feb 2024, 05:34
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Bookmarks
Premise:
The premise is there is an unjustified level of low return in Bonds in comparison to Stocks.
This level of low return cannot be justified by the difference in Gain vs Risk analysis of these two instruments ( stocks / bonds )
The Pay of finalcial planners depends on avoiding risk so they may be avoiding the Stocks more than the Return vs Risk of the stocks can justify -> leading to higher Bonds being bought than expected -> Higher prices of Bond than expected -> Lower return than expected
Hypothesis / prethinking: This low level of return is only becuase the fund managers / Financial planners have become ( abnormally ) less prone to avoid risks which leads to ( abnormally ) higher amounts of Bonds being bought leading to lower than expected return.
This will be valid only if fund managers are avoiding Stocks and buying Bonds at an higher rate than can be justified by their Gain vs Risk analysis.
A. At least some financial planners recommend that at least some of their clients invest only in bonds. ( but doesn't necesscarily lead to unjustifiably larger amount of bonds being bought )
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond ( we are talking about the average Stock and Bond, some Bond may even give higher Return vs Risk than an individual Stock, but we are considering the market in general )
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients. ( this comes very near to our hypothesis,
If we negate this -> Fund managers recomment less investment in stocks but not to an unjustifiable / excessive extent , then the argument falls apart since that would mean Financial planners are not responsible for the phenomenon.
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify. ( If return is greater than the relative safety would justify then this itself could be a alternate reason why Bonds are being bought more than expected leading to lower return , this doesn't need to be assumed if we are considering the Financial planners to be our root cause )
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns. ( irrelevant )
The premise is there is an unjustified level of low return in Bonds in comparison to Stocks.
This level of low return cannot be justified by the difference in Gain vs Risk analysis of these two instruments ( stocks / bonds )
The Pay of finalcial planners depends on avoiding risk so they may be avoiding the Stocks more than the Return vs Risk of the stocks can justify -> leading to higher Bonds being bought than expected -> Higher prices of Bond than expected -> Lower return than expected
Hypothesis / prethinking: This low level of return is only becuase the fund managers / Financial planners have become ( abnormally ) less prone to avoid risks which leads to ( abnormally ) higher amounts of Bonds being bought leading to lower than expected return.
This will be valid only if fund managers are avoiding Stocks and buying Bonds at an higher rate than can be justified by their Gain vs Risk analysis.
A. At least some financial planners recommend that at least some of their clients invest only in bonds. ( but doesn't necesscarily lead to unjustifiably larger amount of bonds being bought )
B. Investing in a specific stock rather than a specific bond is justified if the return will probably be much greater on the stock than on the bond ( we are talking about the average Stock and Bond, some Bond may even give higher Return vs Risk than an individual Stock, but we are considering the market in general )
C. On average, financial planners recommend less investment in stocks than the returns on such investments would justify for their clients. ( this comes very near to our hypothesis,
If we negate this -> Fund managers recomment less investment in stocks but not to an unjustifiable / excessive extent , then the argument falls apart since that would mean Financial planners are not responsible for the phenomenon.
D. The return on bonds is greater, on average, than the relative safety of bond investments would justify. ( If return is greater than the relative safety would justify then this itself could be a alternate reason why Bonds are being bought more than expected leading to lower return , this doesn't need to be assumed if we are considering the Financial planners to be our root cause )
E. At least some financial planners try to increase their pay by recommending to their clients investments in safe stocks with low returns. ( irrelevant )
