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

Question

Investment Advisor: It is well-known that investing in mutual funds reduces portfolio risk through diversification. It is also true that past investment performance is often related to future investment prospects. Therefore, to help my clients earn high returns with low risk, I select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

Which of the following statements, if true, would demonstrate a serious flaw in the approach of the Investment Advisor?

A. Managers of many mutual funds that have delivered the highest returns over the past several years have already used up their best investment ideas and are unlikely to sustain this level of performance in the future.

B. Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable for every investor.

C. Many individual investors choose to manage their own portfolios rather than consult an investment advisor.

D. The funds that have had the strongest past performance tend to continue to outperform other funds with similar objectives for many years in the future.

E. The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.

Bunuel · Accepted Answer

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.

Chetangupta · Answer

Conclusion
Therefore, to help my clients earn high returns with low risk,  I select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

primary claim
 It is also true that past investment performance is often related to future investment prospects.

To weaken this, we need to show that past performance does not gaurantee success in future. A states this and should be the answer.

b) Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable for every investor.-  not really relevant, does not explain why the selection may not meet client's objective

c) Many individual investors choose to manage their own portfolios rather than consult an investment advisor.-  irrelevant

d) The funds that have had the strongest past performance tend to continue to outperform other funds with similar objectives for many years in the future.-  strengthen- ignore

e) The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.-  irrelevant to question asked

bschool83 · Answer

Which of the following statements, if true, would demonstrate a serious flaw in the approach of the Investment Advisor?  -  I read the question first and immediately started looking for an answer that makes the argument illogical.

Then I paraphrased the argument.
evidence: mf - divers. red. risk
evidence: past perf. related to fut. perf.
conclusion: select the mf that meets clients objective and has performed well in past
assumption: (could be) 1. client's objective is - high return low risk 2. the funds performance is limitless

a) Managers of many mutual funds that have delivered the highest returns over the past several years have already used 
up their best investment ideas and are unlikely to sustain this level of performance in the future.   This seems to be the best option because it states that past performance of mutual funds is unlikely to sustain (or it has peaked). This means that the performance can only be worse. therefore it weakens the advisor's argument, in fact, makes it illogical

b) Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable
for every investor.   I initially thought this was correct, because if the advisor is not able to find a suitable fund for an investor. But read carefully. "no single fund is suitable for every investor"... which means there could be a fund that is suitable for only one investor and not others. Hence this option strengthens the argument

c) Many individual investors choose to manage their own portfolios rather than consult an investment advisor . The argument talks about an advisor making a good (low risk high return) investment decision based on past performance of the fund and the client's objectives. Investors making their own investment decisions does not affect investment advisor's proposition - out of scope

d) The funds that have had the strongest past performance tend to continue to outperform other funds with similar 
objectives for many years in the future.   - The argument talks about an advisor making a good (low risk high return) investment decision based on past performance of the fund and the client's objectives. If the good funds tend to outperform other funds in future, it strengthens the argument.

e) The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.   - The argument talks about an advisor making a good (low risk high return) investment decision based on past performance of the fund and the client's objectives. Number of clients is out of scope.

Vercules · Answer

Hi mun23,

Lets first analyze the argument.

Conclusion: Investments in a group of mutual funds which have given high returns in past 2 years will be profitable for the client.

Premises: Investment in mutual funds reduce the investment risk and past performance are often related to future investment prospects

Assumption: Past results will continue in the future.

Although the question stem is saying "flaw"; this is actually a weakening question; the correct answers to the weakening questions usually attack the assumption of the argument.

(A)Managers of many mutual funds that have delivered the highest returns over the past several years have already used up their best investment ideas and are unlikely to sustain this level of performance in the future.

This is the correct answer because it is directly attacking the assumption that the argument is making. If the investments are unlikely to maintain the same levels of performance then investing in the mutual funds which have given excellent results in the past will not deliver the same performance in future, thus, clearly weakening the argument. 
 
(B)Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable for every investor.

Even if a single fund is not suitable for every investor, the group of investments can still give good results. So, our conclusion is not getting weakened.

(C)Many individual investors choose to manage their own portfolios rather than consult an investment advisor.

Not relevant, we are concerned with only the investments made by the investment advisor

(D)The funds that have had the strongest past performance tend to continue to outperform other funds with similar objectives for many years in the future.

This is doing the opposite, (D) will strengthen the conclusion made by the investment adviser.

(E)The number of clients served by the investment adviser has declined by nearly 50% over the past 5 years.

The number of clients may have been reduced, but the investment adviser could still deliver good investments in the past. This choice will have no effect on the conclusion. The clients that he/she may get at present may get good returns on their investments.

Hope that helps,

Vercules

BeckyRobinsonTPR · Answer

This is a weaken type question so you are looking for additional information that tends to make the conclusion not true. The conclusion in this argumetn is that he will invest with funds that have a done well over the past two years, after claiming that past performance is related to future investment. The gap between past and two years creates an assumption that two years is sufficient to show past performance.

DharLog · Answer

Investment Advisor: It is well-known that investing in mutual funds reduces portfolio risk through diversification. It is also true that past investment performance is often related to future investment prospects. Therefore, to help my clients earn high returns with low risk, I select a group of mutual funds that meet the client’s objectives and then invest the client’s assets in the fund that has delivered the highest returns in this group over the past 2 years.

Which of the following statements, if true, would demonstrate a serious flaw in the approach of the Investment Advisor?
 
a) Managers of many mutual funds that have delivered the highest returns over the past several years have already used 
 up their best investment ideas and are unlikely to sustain this level of performance in the future.
 The straight weakener. Mutual funds were good, now they not so good or even not good at all.  
b) Mutual funds span a wide spectrum of investment styles and performance objectives and no single fund is suitable 
 for every investor.
 It weakens the advisor's words, but not so much as A

c) Many individual investors choose to manage their own portfolios rather than consult an investment advisor.
 maybe, but we consider the situation with clients of advisor

d) The funds that have had the strongest past performance tend to continue to outperform other funds with similar 
 objectives for many years in the future.
 it is the strenghener

e) The number of clients served by the investment advisor has declined by nearly 50% over the past 5 years.
 it will be overthinjing if we choose this option. it is simply irrelevant, we can say

Komal324 · Answer

Hello  Bunuel ,

Hope everything is well at your end. I wanted to understand that if the question says that the argument demonstrates a  serious flaw,  does that mean we have to identify a major problem in the reasoning? That seems quite different from a question asking us to  weaken  a reasoning. However, in the official explanation you shared, it says that option A weakens the reasoning of the Investment Advisor. How do I distinguish between a flaw and a weaken question or are they the same?

Thank you for your support.

Best,
Komal

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

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