CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196222
Author: Bodie
Publisher: MCG
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Chapter 12, Problem 1PS
Summary Introduction
To determine:
The differences between the two approaches to security valuation i.e. top-down approach and bottom-up approach and the advantages of top-down approach
Introduction:
In an investing sector, different type of valuation systems is followed for security valuation. Top-down and bottom-up are the two such types of valuation method used.
However, both are having vastly different ways to analyze. Top-down and Bottom-up approach has same goal i.e. to identify best value.
Expert Solution & Answer
Explanation of Solution
Differences between Top-down and Bottom-up security valuation approach:
- Top-Down Approach:Under this approach, investor focus on overall economic condition of stock and evaluate top areas of securities and after that, investor make decisions that which security is beneficial to invest. An investor considers that if the analyzed sector is doing well than industry will also do well. For this analysis, investor focuses on
Economic growth ,monetary policy and inflation rate of industry. - Bottom-up Approach:An investor uses bottom-up valuation approach for analyze that how and individual firm performing well in investing sector on the basis of financial ratios market stability. In this approach investor focus on fundamental of security. For this, investor uses financial ratios, income, cash flow report, management report, sale growth of past years, and market share of company.
Advantages of Top-down approach:
- Top-down approach uses overall market condition,
macroeconomic indicators and industry fundamentals for best investment policy. - Under top-down, investor examines various economic sectors and identify best sector for investment and might also choose any one sector or more than one sector which is more beneficial.
- An investor examines interest rates and
bond prices or inflations to invest in bank stock.
Conclusion
Thus, the top-down valuation aspects are more beneficial for an investor to analyze best security valuation approach.
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Chapter 12 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
Ch. 12 - Prob. 1PSCh. 12 - Why does it make intuitive sense that the slope of...Ch. 12 - Which one of the following firms would be...Ch. 12 - Prob. 4PSCh. 12 - How do each of the following affect the...Ch. 12 - The present value of a firm’s projected cash flows...Ch. 12 - Prob. 7PSCh. 12 - Which of the following is consistent with a...Ch. 12 - Which of the following is not a governmental...Ch. 12 - Prob. 10PS
Ch. 12 - Prob. 11PSCh. 12 - ATech has fixed costs of 7 million and profits of...Ch. 12 - Choose an industry and identify the factors that...Ch. 12 - What monetary and fiscal policies might be...Ch. 12 - If you believe the U.S. dollar is about to...Ch. 12 - Unlike other investors, you believe the Fed is...Ch. 12 - Consider two firms producing smartphones. One uses...Ch. 12 - Prob. 18PSCh. 12 - Prob. 19PSCh. 12 - Prob. 20PSCh. 12 - In which stage of the industry life cycle would...Ch. 12 - Prob. 22PSCh. 12 - Why do you think the change in the index of labor...Ch. 12 - You have 5,000 to invest for the next year and are...Ch. 12 - General Weedkillers dominates the chemical weed...Ch. 12 - Prob. 26PSCh. 12 - Prob. 27PSCh. 12 - Prob. 28PSCh. 12 - Prob. 29PSCh. 12 - Prob. 30PSCh. 12 - Prob. 31PSCh. 12 - Prob. 32PSCh. 12 - Prob. 33CCh. 12 - Prob. 1CPCh. 12 - Prob. 2CPCh. 12 - Prob. 3CPCh. 12 - Prob. 4CPCh. 12 - Prob. 5CPCh. 12 - Prob. 1WM
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