Financial Analyst: A technology startup can achieve long-term profitability only if it develops a diversified product portfolio. Vertex Innovations has recently expanded its offerings to include hardware, software, and consulting services, thereby successfully developing a diversified product portfolio. Thus, Vertex Innovations is guaranteed to achieve long-term profitability.
Which of the following most accurately describes a flaw in the financial analyst's reasoning?
- It treats a condition that is required for a startup to achieve long-term profitability as if it were enough to ensure that profitability.Answer
- BIt assumes that a condition that is sufficient to guarantee long-term profitability is also necessary for such profitability.
- CIt relies on a subtle shift in the meaning of the term 'diversified' between the premises and the conclusion.
- DIt draws a conclusion about the overall profitability of a company based on the success of its individual product lines.
- EIt concludes that a causal relationship exists between product diversification and profitability merely because the two are often correlated.
Answer
The correct answer is the option stating that the argument treats a condition that is required for profitability as if it were enough to ensure profitability.
The argument states that profitability requires a diversified portfolio (Profitability -> Diversified Portfolio). It then establishes that Vertex has a diversified portfolio, and concludes that Vertex will definitely be profitable. This is a classic illegal reversal: the author assumes that because the necessary condition was met, the sufficient condition must inevitably follow.
Step-by-Step Solution
Key Concept
Illegal Reversal (Confusing Necessary and Sufficient Conditions)