During the 1970s, Geert Hofstede was hired by IBM to study the

Question

During the 1970s, Geert Hofstede was hired by IBM to study the differences in behaviors exhibited among each of its international branches. The result of his work was the development of several dimensions of culture.
 
     Cultural dimensions measure the degree to which the people of a particular nation tend to exhibit a specific set of behavioral characteristics. At 0 extreme of the uncertainty avoidance dimension is a description of a hypothetical culture in which the people are totally accepting of ambiguity, are happy to adapt to events as they happen, and are more concerned with actions than principles. At the 120 extreme is a hypothetical culture in which people feel as though they must meticulously plan, attempt to control the events around them, and actions are slow to occur as more concern is given to regulations and absolute truths.
 
     Many years later, Robert House developed a competing set of cultural dimensions, intended to be more comprehensive, under the G.L.O.B.E. program. Some dimensions stayed the same, such as uncertainty avoidance, but the measurement varied. Other dimensions were changed entirely - for instance, Hofstede’s dimension of cultural masculinity/femininity was removed.
      In equity investing, risk aversion refers to the degree to which a particular investor is unwilling to accept financial risk. There are a number of factors which can contribute to financial risk, but the ultimate point is that the investor is trying to reduce the probability that one of the investments will lose rather than gain value. If the investor knew that the investment would lose value, then it’s no longer considered a risk, but rather a cost; so financial risk is inherently a form of uncertainty.
 
     There are several metrics which measure equity risk. These include such factors as the price to earnings ratio, which is calculated by dividing the price of each share of equity by the amount of earnings made by the company per share of equity. As the price goes higher above the earnings per share, questions begin to arise whether the high price can be sustained since the amount of money earned by shareholders will be comparatively lower.
 
     Another type of risk metric measures volatility. For example, beta looks at the movements in the stock market as a whole, and then compares it to the movements in the price of an individual stock. If the individual stock moves more than the market (has beta greater than 1), it is considered more volatile – associated with higher risk.
 The value of the stock market is strongly correlated with national production levels – gross domestic product. As GDP growth increases, investors anticipate that companies will generate higher earnings in the future, and so they are willing to pay a higher price for the equities, relative to the current earnings.

call_me_sid · Answer

Can someone please explain the logic behind the 3rd question?

neeleshg06 · Answer

In a nation with high GDP growth rates, and an uncertainty avoidance of 110, which of the following is likely of the investors?
 Buying an investment with a beta of 2 - Too risky, 110 uncertainty avoidance would not do this.
 Selling an investment with an extremely low price to earnings ratio - high GDP growth would make this a good investment, so 110 uncertainty avoidance would buy instead of sell.
 Holding an investment with a high price to earnings ratio - 110 uncertainty avoidance would not do this as the returns of this is uncertain.
 Selling an investment with a beta of 0.5 - same as (b) 
 Selling a stock with a high price to earning ratio - 110 uncertainty avoidance would do this to avoid uncertainty.

Between (c) and (e), 110 uncertainty avoidance would pick (e). Hence Answer is (e)

Gemmie · Answer

1. Based on the information provided, which of the following would be considered an investment of the highest risk? 
  High beta, high price to earnings ratio, low GDP growth

Beta : Measures the volatility of a stock compared to the market.
  + High beta  indicates higher volatility, and thus, higher risk .
 + Low beta  indicates lower volatility, and thus, lower risk.

Price to Earnings (P/E) Ratio :
  + A high P/E ratio  suggests that the stock might be overvalued, which can be risky if the earnings do not justify the high price. 
 + A low P/E ratio  suggests the stock might be undervalued, which could be less risky.

GDP Growth :
 + High GDP growth  is generally positive for the economy and can reduce perceived risk as companies are expected to perform better.
  + Low GDP growth  suggests a weaker economy, potentially increasing the risk of investments.

2. For each of the following, select True if the statement is true as per the information provided. Otherwise select False.

One would expect investors from a nation with uncertainty avoidance of 30 or lower to hold equities with higher price to earnings ratio. => True

Investors in nations with low uncertainty avoidance (e.g., 30 or lower) are more comfortable with ambiguity and risk.

=> They might be more willing to invest in equities with higher price-to-earnings (P/E) ratios, as these often carry more risk due to potential overvaluation.

One would expect investors from a nation with uncertainty avoidance of 80 or higher to hold equities with higher beta. => False

Investors in nations with high uncertainty avoidance (e.g., 80 or higher) prefer to avoid risk and uncertainty.

=> They would likely avoid equities with high beta, which are more volatile and thus riskier.

The fast change caused by high GDP growth will inherently cause beta to rise above 1. => False

High GDP growth can lead to a positive economic outlook and higher stock prices, but it does not inherently cause beta to rise above 1.

Beta is a measure of a stock's volatility relative to the market, and it does not directly depend on GDP growth. A stock can have a beta below 1 even in a fast-growing economy.

3. In a nation with high GDP growth rates, and an uncertainty avoidance of 110, which of the following is likely of the investors? 
 Selling a stock with a high price to earning ratio

-   High GDP growth : This suggests a positive economic outlook, potentially leading to higher stock prices and increased investment opportunities.
 - Uncertainty avoidance of 110 : This indicates an extremely high level of risk aversion. Investors in such a nation prefer stability, certainty, and are likely to avoid high-risk investments.

Buying an investment with a beta of 2 : 
 Unlikely : A beta of 2 indicates very high volatility and risk, which would not appeal to risk-averse investors. Given the high uncertainty avoidance, they are unlikely to buy such a high-risk investment.

Selling an investment with an extremely low price to earnings ratio : 
 Unlikely : A low price-to-earnings (P/E) ratio often suggests that a stock might be undervalued and potentially less risky. Investors with high uncertainty avoidance might prefer holding onto such safer investments rather than selling them.

Holding an investment with a high price to earnings ratio   : 
 Unlikely : A high P/E ratio suggests potential overvaluation and higher risk, which would not appeal to risk-averse investors. They might avoid holding such investments.

Selling an investment with a beta of 0.5  :
 Unlikely : A beta of 0.5 indicates low volatility and lower risk. Investors with high uncertainty avoidance would likely prefer to keep such stable investments rather than selling them.

Selling a stock with a high price to earnings ratio : 
 Likely : A high P/E ratio implies that the stock might be overvalued and carries more risk. Given the extremely high uncertainty avoidance, investors are more likstability, certainty, and are likely to avoid high-risk investments.

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	Low beta, high price to earnings ratio, high GDP growth
	High beta, low price to earnings ratio, low GDP growth
	Low beta, low price to earnings ratio, low GDP growth
	High beta, low price to earnings ratio, high GDP growth
	High beta, high price to earnings ratio, low GDP growth

During the 1970s, Geert Hofstede was hired by IBM to study the

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True	False
		One would expect investors from a nation with uncertainty avoidance of 30 or lower to hold equities with higher price to earnings ratio.
		One would expect investors from a nation with uncertainty avoidance of 80 or higher to hold equities with higher beta.
		The fast change caused by high GDP growth will inherently cause beta to rise above 1.

	Buying an investment with a beta of 2
	Selling an investment with an extremely low price to earnings ratio
	Holding an investment with a high price to earnings ratio
	Selling an investment with a beta of 0.5
	Selling a stock with a high price to earning ratio

GMAT Multi-Source Reasoning (MSR) Questions

During the 1970s, Geert Hofstede was hired by IBM to study the

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