Question

Principle: An investment strategy is prudent only if it does not expose the investor to an unacceptable level of financial risk. Application: Noah has recently begun using a strategy that includes investing in early-stage tech startups. Although the strategy diversifies his portfolio, it increases his exposure to assets that are less stable than traditional blue-chip stocks. Therefore, his strategy is not prudent. The application of the principle is most vulnerable to criticism on which one of the following grounds?

• A. It overlooks the possibility that diversification may help manage financial risk, even if the assets are individually volatile.
• B. It takes for granted that any increase in exposure to less stable assets results in an unacceptable level of risk.
• C. It assumes that traditional investments are always less risky than alternatives.
• D. It fails to consider that some early-stage startups can provide exceptionally high returns.

Hint:

When a principle is applied to a specific case, look for mismatches between the terms in the evidence and the terms in the principle. The flaw often involves assuming that two similar-sounding but distinct concepts are identical (e.g., 'less stable' is not the same as 'unacceptably risky').

Answer 1

The Correct Option is B

Step 1: Understanding the Concept
This is a "Flaw in Reasoning" question, specifically one that involves applying a principle. The flaw usually lies in a misinterpretation or misapplication of the terms in the principle.
Step 2: Detailed Explanation
Let's break down the components:

Principle: Not Prudent \(\leftarrow\) Unacceptable Risk. (If risk is unacceptable, strategy is not prudent).
Evidence about Noah: Strategy includes less stable assets.
Conclusion about Noah: Strategy is not prudent.
The Gap: The argument moves from "exposure to less stable assets" directly to the conclusion "not prudent." To do this using the principle, it must implicitly equate "exposure to less stable assets" with "an unacceptable level of financial risk." This is a significant logical leap. A small exposure to less stable assets might increase risk slightly but not necessarily to an "unacceptable" level. The argument fails to justify that this threshold has been crossed.
Step 3: Final Answer
Let's analyze the options:

(A) This is a valid point about diversification, but the core flaw is in the assumption about risk level, not the mechanics of diversification.
(B) This perfectly captures the flaw. The argument assumes that *any* increase in exposure to volatile assets automatically means the overall risk level is now "unacceptable." It takes a necessary condition from the evidence ("less stable") and treats it as sufficient to trigger the condition in the principle ("unacceptable").
(C) The argument doesn't assume this is *always* true, just that it is in this case.
(D) The principle is about risk, not returns. High potential returns do not negate the risk, so this is not a flaw in applying the principle.
Option (B) points out the unjustified leap in logic: the argument assumes without evidence that the risk has crossed the "unacceptable" threshold.