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The more worried investors are about losing their money, the more they

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The more worried investors are about losing their money, the more they  [#permalink]

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New post Updated on: 06 Mar 2018, 20:25
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Official Guide for GMAT Verbal Review, 2nd Edition

Practice Question
Question No.: 38
Page: 130

Which of the following best completes the passage below?

The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that __________.

(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money

(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral

(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation

(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay

(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company

Originally posted by joyseychow on 27 Oct 2009, 06:23.
Last edited by hazelnut on 06 Mar 2018, 20:25, edited 6 times in total.
Reformatted question
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New post 27 Oct 2009, 07:11
joyseychow wrote:
Which of the following best completes the passage below?
The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that______
(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company



B best suits here. The higher potential of loosing money (unsecured loan) - the higher return (interest rate). B clearly serves as a fact to support argument.
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New post 27 Oct 2009, 07:36
(B) because

lenders receive higher interest rates on unsecured loans(GREATER RISK) than on loans backed by collateral(LESS RISKY)

joyseychow wrote:
Which of the following best completes the passage below?
The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that______
(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company

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New post 27 Oct 2009, 11:20
B-greater risk, higher return. Pretty straight forward question
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New post 27 Oct 2009, 11:22
clear B since it exemplifies the stimulus.
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New post 23 Mar 2012, 10:15
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I have chosen B for this question:

This question is looking for an example to match the relationship between high risk and high reward.

A. The relationship between high risk and high reward is not mentioned here. Although "very risky investments" is mentioned, there really is no mention of high rewards. You might argue that successful investors obtain "high rewards," but this is not necessarily true because successful investors could obtain many small rewards and still be successful.

B. This answer choice clearly shows an example of the relationship between high risk and high rewards. If you are an individual buying a bond in a company, it would be less risky for the bond to be backed by collateral than without collateral. Therefore, the higher risk bond would yield higher interests rates and the lower risk bonds (backed by collateral) would yield lower interest rates.

C. First of all, we are introducing a "time of inflation," which is a bit suspicious to me. Although these questions can bring in "outside" information, by saying "in times of inflation," we are not sure whether this is a time of high or low risk. Also, the remaining part of this answer choice does not express the relationship of high risk and high reward.

D. This statement actually weakens the argument because it contradicts the main relationship. By saying that some banks have a single interest rate for all individuals, you are ignoring the fact that individuals have different risk levels.

E. This also contradicts the main argument. It states that new companies (typically higher risk) have a lower potential return on investment than companies are lower risk.
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New post 24 Aug 2012, 00:47
1
Which of the following best completes the passage below?
The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that______
(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company
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New post 24 Aug 2012, 03:11
PUNEETSCHDV wrote:
Which of the following best completes the passage below?
The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards. This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that______
(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company


The conclusion of the passage says : Higher risk --> Higher Gains
Option B directly matches the conclusion hence it is the answer.
option A may have been tempting but was ruled out due to words"without worrying about their money"
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New post 16 May 2013, 05:16
How would you classify this question? Really tough one...
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Re: The more worried investors are about losing their money, the more they  [#permalink]

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New post 17 May 2013, 10:36
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fozzzy wrote:
How would you classify this question? Really tough one...


The more worried investors are about losing their money, the more they will demand a high potential return on their investment; great risks must be offset by the chance of great rewards.
From this part one thing has to be taken: high risk = high return

This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that______

We have to complete the passage with a sentence that supports the highlighted principle above.

(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
Does this reflect the principle? No, move on
(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
CORRECT: "higher interest rates on unsecured loans than on loans backed by collateral" is a clear example of more risk => more return
(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
Same as A, does this reflect the principle? No, move on
(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
This goes against the principle, if a bank has a single rate then all loans (risky and not) will pay the same.
(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company
This goes asainst the principle as well. If a more risky company (the new one) pays lower returns than a more secure one, the principle more risk=> more return is violated
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New post 17 May 2013, 21:59
Great Explanation! Thanks a lot +1 kudos
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New post 08 Apr 2017, 13:27
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This is a COMPLETE THE ARGUMENT QUESTION.

Logic: Investors – High Risk ---- High Return (Greater Risk – Greater Reward)

This question can be difficult if you don’t stick by the principal and mix your own thoughts into this. Let’s evaluate each option.

(A) successful investors are distinguished by an ability to make very risky investments without worrying about their money
- This means that investors are doing risky investments and do not expect higher returns (As they say without worrying about money). This contradicts to given logic where risky investor is looking expecting higher returns. This mentions “risky investments” words from argument but does not really follow the logic. Hence, this is option is out.


(B) lenders receive higher interest rates on unsecured loans than on loans backed by collateral
- lenders expect higher interest rate (High Reward) for unsecured loans (higher risk) compared to loans backed by collaterals (low risk – as they can recover money by selling the collateral) – This talks about high risk and high reward – This looks like the answer, hold this and lets check others.

(C) in times of high inflation, the interest paid to depositors by banks can actually be below the rate of inflation
- As this is talking about depositors – investors who are looking to safe keep their money – this option is not valid for us as it is talking about high risk


(D) at any one time, a commercial bank will have a single rate of interest that it will expect all of its individual borrowers to pay
- This options talks about single interest rate for all the investors (high and low risk takers) this does not support the logic above, rather contradicts, hence this option is out as well.

(E) the potential return on investment in a new company is typically lower than the potential return on investment in a well-established company
- Investment in New Company (High risk) – Return Low. This is exactly opposite of the given logic. Hence, C is also out.


B is the CORRECT answer.
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New post 16 Aug 2017, 00:14
The correct choice is 'B' - the statement clearly justifies that riskier loans that are not backed by collateral will receive the benefit of higher interest rates.
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New post 20 Sep 2017, 13:54
Doesn't look like a 5% difficulty level question, thoughts?
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New post 19 Apr 2018, 02:11
GMATNinja, mikemcgarry, egmat, sayantanc2k

Why specifically option A is wrong?
I feel option A suggests that successful investors.....risky investment
So. successful implies rewards. Moreover, this correlation is generalized closing the loophole that some successful investors could not have taken risks.
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New post 21 Apr 2018, 11:18
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gmatacer40 wrote:
GMATNinja, mikemcgarry, egmat, sayantanc2k

Why specifically option A is wrong?
I feel option A suggests that successful investors.....risky investment
So. successful implies rewards. Moreover, this correlation is generalized closing the loophole that some successful investors could not have taken risks.

We need an answer choice that specifically illustrates how greater risks must be offset by the chance of greater rewards. (B) clearly illustrates this principle: higher interest rates (higher reward) for greater risk (unsecured loans).

(A) does not specifically demonstrate this principle. It doesn't say anything about offsetting greater risks with greater rewards. Sure, successful investors obviously enjoy rewards, but do those rewards increase as risks increase?

(B) is a better answer.
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The more worried investors are about losing their money, the more they  [#permalink]

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New post 31 May 2018, 10:05
fozzzy wrote:
How would you classify this question? Really tough one...


I think being a finance major helped me tackle this question with ease. For someone who might not be familiar with the subject matter then this might have been a tricky one for him but none the less if you have a good approach then you could tackle such questions.
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