medium · GMAT Verbal
An investment analyst annually publishes a list of the ten stocks in a five-hundred-stock index that posted the single worst returns during the previous calendar year. Over the most recent five-year period, the average one-year return of the stocks on this list, measured the year after they appeared on it, was twenty-two percent, compared with the index's overall average annual return of nine percent during the same years, and an investment firm proposes launching a fund that buys only stocks currently on the analyst's list, projecting the new fund will continue to outperform the index by a similar margin.
Which of the following, if true, most seriously weakens the investment firm's projection?
- The five-hundred-stock index includes companies from a wider range of industries than the ten stocks that typically appear on the analyst's list.
- The analyst has published this list of worst-performing stocks every year for over a decade.
- Transaction costs for buying and selling ten individual stocks are higher than the transaction costs of investing in a fund that tracks the entire index.
- The list selects stocks whose prices fell furthest below their historical average, a group statistically likely to drift back regardless of real change.
- The investment firm plans to charge a lower management fee for its proposed fund than it charges for its other existing funds.
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