Question

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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 to 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?

(This question is from the Official Guide. Therefore, because of copyrights, the complete question cannot be copied here. The question can be accessed at GMAT Club)

Solution

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The Story

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

It is common for corporate workers and directors to buy and sell stock in their own companies.

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.

• Inside sales and inside purchases: sale and purchase of stocks by officers and directors of the company (let’s just call them company employees)
• ‘Ratio of inside sales to inside purchases’: Ratio of number of stocks sold by company employees to number of stocks purchased by company employees
• When this ratio falls below 2 to 1: So, when the number of shares sold becomes less than twice the number of shares bought – e.g. 100 shares sold and 60 shares bought.

This statement is talking about a general trend. When the ratio of inside sales to inside purchases goes below a certain level, the stock’s price increases.

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.

This statement talks about a particular company. 

MEGA’s stock price has been falling.

The ratio of inside sales to inside purchases: 1 to 9 (1:9).

A few things to note:

1. The employees have bought up to 9 times as many shares as they have sold.
   • Shares bought > shares sold
   • Shares bought = 9 x shares sold
   • So, if the number of shares sold is 100, the number shares bought would be up to 100 x 9 (= 900).
2. The ‘below 2 to 1’ ratio mentioned above is of sales to purchases (bought 100, sold 60)
3. In terms of a ratio of sales to purchases this 9x figure talked about in this statement would be 1:9. The ratio would not be 9:1. 
4. 1:9 is significantly less than 2:1
   • 1:9 :: 1/9 = 0.11
   • 2:1 :: 2/1 = 2
   • 2 is almost 20 times of 0.11
   • So, 2:1 almost 20x of 1:10
   • 1:9 is significantly less than 2:1

Question Stem

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The facts above best support which of the following predictions?

An ideal answer choice would be an inference based on the passage. 

One prediction that comes to mind is: Since the ratio of inside sales to inside purchases in the company is less than 2:1 (1:9 is less than 2:1), the company’s stock price will increase.

Answer choice analysis

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