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

Question

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

ID: 100947

whamberto · Accepted Answer

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.

bsv180985 · Answer

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.

nitya34 · Answer

(B) because

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

PrincetonMBA2007 · Answer

B-greater risk, higher return. Pretty straight forward question

sanki779 · Answer

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"

fozzzy · Answer

How would you classify this question? Really tough one...

Zarrolou · Answer

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

ydmuley · Answer

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.

AnubhavK · Answer

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.

gmatacer40 · Answer

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.

GMATNinja · Answer

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.

CAMANISHPARMAR · Answer

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.

Akshaywastaken · Answer

Hey I am having trouble in solving question which got even the slightest of economic aspects to it . Can any one suggest me something how to overcome this problem.
 Thank you

Posted from my mobile device

GMATWhizTeam · Answer

Hi Akshay The problem you are facing is a common one. However, there is no need for such apprehension since GMAT does not present any question that would give a student advantage based on field of knowledge. You can solve such problems through analysing the given data: The more worried investors are about losing their money, the more they will demand a high potential return on their investment; • One is expected to understand that an investor invests money in return for some monetary advantage. This knowledge is common knowledge, not specific to economics. • Worried about losing money implies high risk on investment • So high risk, high return expected great risks must be offset by the chance of great rewards. • So, high risk must be compensated by possibility of high returns This principle is the fundamental one in determining interest rates, and it is illustrated by the fact that___ • So interest rates are based on this principle o High risk ----> high returns/high interest (monetary return for investors) So, you can see that all you need is a fear free mind to carefully analyse the given information. Still if you want to have some basic idea about economics you can check out investopedia.com Hope this helps

PrashantK0099 · Answer

higher interest rates on unsecured loans than on loans backed by collateralis a clear example of more risk

hence bakcing the conclusion that greater risk = greater return hence B

AnirudhaS · Answer

OE:
  Situation   The principle of determining interest rates is related to
the risk involved in making the investment of a loan. Potentially
greater rewards will lead lenders (investors) to accept greater risks.
  Reasoning   Which example illustrates the principle that greater
risks should produce greater rewards? The example must be about
the relationship of risk to benefit. Lenders take a greater risk when
loans are unsecured (not backed by collateral) because there is a
chance they could lose their money entirely. The principle indicates
that the lenders—who by definition are investors—would demand the
reward of higher interest rates.
A. The freedom from anxiety enjoyed by some investors is not relevant.
While risky investments are mentioned, this statement does not
mention their return.
B.  Correct.  This statement properly identifies an example that shows
that riskier loans—those not backed by collateral—receive the
benefit of higher interest rates.
C. This discussion of interest rates in times of inflation does not
mention potential risk or potential benefit.
D. A single rate of interest for all investments, no matter the level of
risk, contradicts the principle and so cannot possibly be an example
of it.
E. New companies are generally riskier than established ones. A lower
rate of return for such riskier new companies contradicts the
principle.
 The correct answer is B.

A_Nishith · Answer

(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

Answer: B

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

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