UPSC Prelims 2020 CSAT Paper II · Q4 of 80 Comprehension medium

Passage

Asset allocation is the most important investment decision we will ever make, and sadly, most of us do not give that decision the importance it deserves. We are adamant about seeking predictability with our future. We tend to think of investing in risky assets as extremely volatile and value eroding. We also dislike fluctuating returns and the loss of control of investment. We think our money is best left idle, unproductive but safe. There is no asset that is risk-free. We could lose our jobs, our homes can lose value, our banks can go bankrupt, our bonds can default, the government can collapse and companies we chose fondly may cease to exist. But we cannot live life assuming that all these extreme events are waiting to happen, and all at the same time. All these extreme forms of risks we know will not manifest at the same time.

Which one of the following statements best implies the suggestion given by the author of the passage?

  1. (a) Distribute your wealth across different kinds of assets so that your risks would be minimized. ✓ UPSC's answer
  2. (b) Risk-taking behaviour should be a necessary component of your personality if you want to generate wealth.
  3. (c) While making investments, find a trustworthy asset management organization which would manage your wealth for you.
  4. (d) You should know that investing your money is a risky business.

Why the answer is (a)

• The passage argues that while all assets carry some form of risk (job loss, home value drop, bank bankruptcy, bond default), these extreme risks do not manifest simultaneously.

• The author criticizes the tendency to keep money 'idle, unproductive but safe' because no asset is truly risk-free.

• The core logic is that since different risks occur at different times, holding a mix of assets prevents total loss from any single event.

• Therefore, the implied suggestion is to spread investments across various asset classes to mitigate the impact of any specific risk materializing.

• This aligns with the concept of diversification, which is the primary method to minimize overall portfolio risk as described in the text.

Why the other options are wrong

(b) Risk-taking behaviour should be a necessary component of your personality if you want to…
The passage does not suggest that risk-taking must be a personality trait, but rather that one should not assume all extreme risks happen at once.
(c) While making investments, find a trustworthy asset management organization which would…
The text focuses on the strategic decision of asset allocation and does not recommend delegating wealth management to a specific organization.
(d) You should know that investing your money is a risky business.
While the passage acknowledges that investing involves risk, the main suggestion is about how to handle that risk through allocation, not merely stating that it is risky.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2020, held on 4 October 2020. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

Reading the answer is not the same as getting it right under a clock. Practise this question with UPSC's negative marking, and anything you miss goes into an error notebook until you get it right twice.

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