Question


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)

Difficulty: Medium

Accuracy: 76%

Based on: 4265 sessions

Solution


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


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


Answer Choice: A

Incorrect

Selected by: 7%

i.e. the ratio (currently 1:9) will continue to dip. I don’t get any such indication from the passage. In fact, since the current ratio could lead to an increase in stock price, perhaps inside sales increase and inside purchases reduce. So, I’d imagine that the imbalance will actually reduce. Though I couldn’t infer that either.


Answer Choice: B

Incorrect

Selected by: 2%

Since the current inside sales to inside purchases ratio would lead to an increase in stock price, maybe inside purchases would reduce. However, there is nothing in the passage to support that inside purchases will cease abruptly, and that too in the near future.


Answer Choice: C

Correct

Selected by: 76%

We’re given that:

  1. When the ratio of inside sales to inside purchases goes below 2 to 1, a rise in stock prices is imminent
  2. We’re given that the ratio of inside sales to inside purchases at MEGA is 1 to 9.

1 to 9 is significantly lower than 2 to 1. 

So, a rise in MEGA’s stock price is imminent (about to happen).

.


Answer Choice: D

Incorrect

Selected by: 9%

We can, in fact, predict that this will not happen. As discussed in the previous answer choice, the price of MEGA stock will soon rise. So, the prediction that the price of the stock will continue to drop is contrary and not supported by the passage.


Answer Choice: E

Incorrect

Selected by: 7%

All we have is the current ratio of sales to purchases by MEGA employees. 

  1. We don’t know the number of shares bought and sold by them
  2. Even if we were given those numbers – say 100 sold and 900 bought. We don’t know how many shares the company has in total. i.e., these 1000 shares make up what proportion of the company’s total shares.

If you have any doubts regarding any part of this solution, please feel free to ask in the comments section.

Anish Passi

GMAT Coach

With over a decade of GMAT training experience, top 1 percentile scores on the CAT and GMAT, and a passion for teaching, I’d like to believe I am quite qualified to be a GMAT coach. GMAT is learnable, and I help students master the GMAT through a process-oriented approach based on logic and common sense. I offer private tutoring and live-online classroom courses. My sessions are often sprinkled with real-world examples, references to movies, and jokes that only I find funny. You’ve been warned 🙂

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