Corporate officers and directors commonly buy and sell, for their own portfolios, stock in their own corporations. Generally, when the...

GMAT Critical Reasoning : (CR) Questions

Source: Official Guide

Critical Reasoning

Inference

MEDIUM

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Corporate officers and directors commonly buy and sell, for their own portfolios, stock in their own corporations. Generally, when the ratio of such inside sales to inside purchases falls below $2:1$ for a given stock, a rise in stock prices is imminent. In recent days, while the price of MEGA Corporation stock has been falling, the corporation's officers and directors have bought up to nine times as much of it as they have sold.

The facts above best support which of the following predictions?

The imbalance between inside purchases and inside sales of MEGA stock will grow even further.

Inside purchases of MEGA stock are about to cease abruptly.

The price of MEGA stock will soon begin to go up.

The price of MEGA stock will continue to drop, but less rapidly.

The majority of MEGA stock will soon be owned by MEGA's own officers and directors

Solution

Passage Visualization

Passage Statement	Visualization and Linkage
Corporate officers and directors commonly buy and sell, for their own portfolios, stock in their own corporations.	Context Setting: Establishes insider trading as normal practice Key Point: This is routine behavior, not unusual Creates baseline for understanding patterns
Generally, when the ratio of such inside sales to inside purchases falls below 2 to 1 for a given stock, a rise in stock prices is imminent.	Predictive Rule: Sales-to-Purchase ratio as price indicator Normal scenario: Ratio $\geq 2:1$ → No predicted rise Bullish signal: Ratio $< 2:1$ → Price rise coming Examples: Ratio $3:1$ (sell $300K, buy $100K) = No rise predicted Ratio $1.5:1$ (sell $150K, buy $100K) = Rise predicted Ratio $1:2$ (sell $100K, buy $200K) = Rise predicted
In recent days, while the price of MEGA Corporation stock has been falling, the corporation's officers and directors have bought up to nine times as much of it as they have sold.	Current MEGA Situation: Extreme buying behavior during price decline Current ratio: Sales:Purchases = $1:9$ (far below $2:1$ threshold) Concrete example: If they sold $10K worth, they bought $90K worth Pattern match: $1:9$ ratio is dramatically below $2:1$ trigger point Paradox: Heavy insider buying while stock price falls
Overall Implication: MEGA's insider trading pattern ($1:9$ ratio) strongly satisfies the condition for imminent price rise (ratio below $2:1$), despite current falling prices. The insiders' extreme buying behavior suggests they expect the current price decline to reverse.

Valid Inferences

Inference: MEGA Corporation's stock price is likely to rise soon.

Supporting Logic: Since the general rule states that ratios below $2:1$ predict imminent price rises, and MEGA currently has a $1:9$ sales-to-purchase ratio (far below the $2:1$ threshold), the established pattern strongly indicates MEGA's stock price should rise. The fact that insiders are buying nine times more than they're selling represents an extreme version of the bullish signal described in the passage.

Clarification Note: This inference is based solely on the predictive pattern established in the passage, not on any analysis of why insiders might be buying or what fundamental factors might drive the price change.

Answer Choices Explained

The imbalance between inside purchases and inside sales of MEGA stock will grow even further.

The imbalance between inside purchases and inside sales of MEGA stock will grow even further. This choice predicts that the $1:9$ ratio will become even more extreme. However, the passage doesn't provide any information about future insider trading behavior - it only gives us a rule for predicting stock price movements based on current ratios. We have no basis to predict whether insiders will continue buying or change their behavior.

Inside purchases of MEGA stock are about to cease abruptly.

Inside purchases of MEGA stock are about to cease abruptly. This predicts a sudden stop to insider buying. Again, the passage gives us no information about when or why insider trading patterns might change. The focus is on using current ratios to predict stock prices, not predicting future trading behavior.

The price of MEGA stock will soon begin to go up.

The price of MEGA stock will soon begin to go up. This directly applies the rule from the passage to MEGA's situation. Since MEGA's sales-to-purchase ratio ($1:9$) is far below the $2:1$ threshold that predicts price rises, and the passage states such ratios indicate 'imminent' price increases, this prediction follows logically from the given facts.

The price of MEGA stock will continue to drop, but less rapidly.

The price of MEGA stock will continue to drop, but less rapidly. This contradicts the established rule. If ratios below $2:1$ predict price rises, and MEGA's ratio is $1:9$, we should expect the price to rise, not continue dropping at any rate.

The majority of MEGA stock will soon be owned by MEGA's own officers and directors

The majority of MEGA stock will soon be owned by MEGA's own officers and directors. This makes an extreme prediction about ownership concentration that goes far beyond what the passage supports. Even heavy insider buying doesn't necessarily mean they'll acquire majority ownership, and we have no information about total shares outstanding or current ownership percentages.

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