Finance professor: Historical data indicate that diversified portfolios experience less volatility than portfolios composed of only a few stocks. Therefore, investors seeking stable returns should diversify their holdings broadly.
Which option correctly identifies the premise in the professor's argument?
- Market volatility has increased significantly in recent years due to global uncertainty.
- Investors seeking stable returns should diversify their holdings broadly across multiple sectors.
- Some investors prefer the possibility of high short-term gains over stability.
- Historical data indicate that diversified portfolios experience less volatility than portfolios of few stocks. (correct answer)
Explanation: When tackling argument structure questions, you need to distinguish between premises (evidence or support) and conclusions (what the author is trying to prove). The premise provides the foundation for the argument, while the conclusion is what the author wants you to accept based on that foundation. In this argument, the professor presents historical data as evidence and then draws a recommendation from it. The premise is the factual claim that serves as support: "Historical data indicate that diversified portfolios experience less volatility than portfolios composed of only a few stocks." This is the evidence the professor uses to justify the conclusion that investors should diversify broadly. Option D correctly identifies this premise by restating it almost verbatim. This is the foundational claim that makes the rest of the argument possible. Option A introduces information about recent market volatility that doesn't appear anywhere in the passage. This is completely irrelevant to the professor's argument. Option B restates the conclusion, not the premise—it's what the professor is trying to convince you to do, based on the historical data. Option C mentions investor preferences for high gains, which is neither stated nor implied in the passage and doesn't function as support for the professor's recommendation. Remember that premises answer "why should I believe this?" while conclusions answer "what should I believe?" Look for signal words like "because," "since," or "data indicate" to spot premises, and "therefore," "should," or "must" to identify conclusions. The premise always provides the logical foundation for everything else.