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Is the following sentence considered correct on the GMAT?
Knowledge's importance is obvious.
Why is it incorrect?
The sentence is incorrect. Because knowledge is an abstract noun, we cannot use 's to express possession.
Not all that glitters is gold, and not everything that sounds bad is incorrect. In fact, the GMAT writers count on test takers to work according to hearing and create questions in which the correct answer sounds bad and incorrect answers sound great.
In order to score highly on the GMAT, make sure that your decision making process is based on rule based analytical thinking rather than intuition.
Incorrect. What counts in the decision whether to express possession by using 's or of is not the possessed noun but rather the possessing noun.
Knowledge is an abstract noun, so possession must be expressed by of.
Importance is an abstract noun, so possession must be expressed by of.