Investment in Shares vs. Investment in Other Assets
Read Investment in Shares vs. Investment in Other Assets and check the IELTS Reading answers. It all began in 1958 with a phone call from Louis Engel, a banker at Merrill Lynch, a US-based financial management company, who wanted to know how investors in shares had performed relative to investors i…
Passage preview
It all began in 1958 with a phone call from Louis Engel, a banker at Merrill Lynch, a US-based financial management company, who wanted to know how investors in shares had performed relative to investors in other assets such as low-risk investments with guaranteed returns. ‘I don’t know, but if you gave me $50,000 I could find out,’ replied Jim Lorie, a dean at the University of Chicago’s business school. Louis Engel soon agreed to provide the funding, and more. The result, in 1960, was the launch of the University’s Center for Research in Security Prices. Half a century later CRSP (pronounced ‘crisp’) data are everywhere. They provided the foundation of at least one-third of all empirical research in finance over the past 40 years, according to a presentation at a symposium held this month. They probably influenced much of the rest.
Vocabulary from this passage
13 words worth learning before you sit the test, each with the sentence it appears in.
- anomaly noun
An irregularity or deviation from what is normal or predicted, such as a pattern in share prices that contradicts accepted theory
The unexplained anomaly in the readings prompted the team to recalibrate their instruments.
- concede verb
To admit, often reluctantly, that something is true or valid after previously resisting or denying it
The minister conceded that the original forecasts had been overly optimistic.
- contention noun
A claim or assertion put forward as part of an argument, often one that others may dispute
Her central contention is that deregulation, not greed, triggered the downturn.
- data mining noun
The practice of searching large datasets for patterns or relationships, often without a prior hypothesis, which can produce misleading findings
Excessive data mining can generate spurious correlations that vanish when tested on fresh samples.
- efficient-market hypothesis noun
The theory that share prices already reflect all relevant information, so investors cannot consistently predict price movements or outperform the market
Critics argue that the efficient-market hypothesis cannot account for sudden speculative bubbles and crashes.
- empirical adjective
Based on observation, measurement and real-world data rather than on pure theory, as in the financial studies that used CRSP records
Empirical studies of commuter behaviour challenged the planners' assumptions about public transport demand.
- equity risk premium noun
The extra return investors require for holding risky shares rather than safe assets, compensating them for the possibility of losing money
Analysts disagree about how large the equity risk premium should be after a prolonged market boom.
- inherent adjective
Existing as a natural, essential and permanent part of something, so that it cannot be separated from it
Uncertainty is inherent in any attempt to forecast long-term economic growth.
- lucrative adjective
Producing a great deal of profit or financial reward, as a market irregularity might for investors able to exploit it
Pharmaceutical patents can be extremely lucrative for firms that secure them early.
- replicate verb
To copy or reproduce something exactly, especially a system or experiment, in another setting or place
Other laboratories failed to replicate the results under identical conditions.
- rigorous adjective
Extremely thorough, exact and careful, especially in method or analysis, leaving little room for error or bias
The journal demands rigorous peer review before any article is accepted for publication.
- stipulation noun
A condition or qualification that is specifically demanded or added as part of an argument, agreement or claim
The grant came with a stipulation that all findings be published openly.
- vulnerability noun
A weakness or exposure that makes a system, institution or person easily harmed, here in the financial system
The audit exposed serious vulnerabilities in the bank's risk management procedures.
Answers with explanations
- 14. iii
Paragraph A describes how the project began with a **phone call** from a banker asking a question, followed by an offer of funding. That is the **request** in the heading. The paragraph then says that half a century later the data are **everywhere** and underpin one-third of all empirical finance research. That is the **far-reaching result**. The heading about initial findings is wrong, because no findings are reported here; they appear in a later paragraph.
- 15. iv
Paragraph B outlines how assembling the data was a **tough process**, requiring the manual transfer of three million pieces of paper information onto tape while making complex price adjustments. This clearly details the **difficulties in collecting CRSP data**, matching heading iv.
- 16. ii
The key is the phrase **first study** based on the CRSP data in 1964. The paragraph reports the **annual compound return** on shares, between 6.8% and 9%, and the claim that this was **substantially higher** than alternative investments. These are the **initial findings** of the project. The heading about collecting data fits the previous paragraph, and the heading about technology fits the paragraph on computing power, so neither is the best match here.
- 17. i
Paragraph D discusses how the CRSP data became "ever more useful" as **computing power became more affordable**, allowing the database to be updated and expanded. This link between computer advancements and database improvement matches heading i: "Technological developments improve CRSP data".
- 18. viii
Paragraph E explains that while data mining can find price variations, these anomalies **typically disappear** as soon as they are discovered. Therefore, they cannot be reliably exploited by smart investors. This demonstrates heading viii: "CRSP data not always being a useful basis for investment".
- 19. vi
Paragraph F explores a criticism that the sheer volume of statistical data forces economists to become too specialized. Because of this, they **fail to see and understand the whole** picture. This is a direct paraphrase of heading vi: "Too much data for people to have an overall understanding".
- 20. v
Paragraph G reveals the **plans unveiled** for CRSP moving forward, which include expanding their range of investment indicators to ensure "continuing success." Discussing upcoming plans perfectly matches heading v: "What the future holds".
- 21. D
Look for the economist who talks about foreseeing the **2008 crisis**, which paraphrases a financial downturn. Shiller says that to have **seen it coming** it would have been better to go back to **old-fashioned readings** of history, studying institutions and laws. The question's **traditional approach** matches old-fashioned, so the answer is the economist who is a sceptic about the efficient-market hypothesis. Fisher and Lorie discuss investor caution and Fama discusses price patterns, not crises.
- 22. A
The question describes people who invest conservatively and consequently **make less money**. The passage credits **Fisher and Lorie** with observing that people who are **cautious by nature** choose assets with **lower returns**. This perfectly aligns with Option A.
- 23. C
The question describes forecasting share prices, but not **over the long term**. Fama found that over a **lengthy period** prices moved randomly, with no predictable pattern. However, he **conceded** some evidence of **temporary short-term predictability**. So prediction is possible only briefly, which matches the statement. Fisher and Lorie and Scholes are never linked to price forecasting, and Shiller is about the crisis, so Fama is the only fit.
- 24. banker
The summary requires a noun describing Louis Engel's profession at the financial management company. The passage explicitly states he was a **banker** at Merrill Lynch. The single word "banker" accurately completes the sentence.
- 25. computers
The sentence states that compiling data was hard because something was **still being developed**. The passage points out it was a tough process because it happened in "the early days of **computers**." This implies computer technology was still in its infancy, making "computers" the correct word.
- 26. paper
The summary needs the noun for the medium where information was previously stored before being put onto magnetic tape. The text explicitly states that the data was transferred **from paper** to magnetic tape. Therefore, "paper" is the correct one-word answer.