Top-Down, Three-Step Approach in Investment Analysis

C

Advocates of the top-down, three-step approach stress the importance of economy and industry-wide conditions on stock values and returns.

The advocates of the top-down, three-step approach believe that the economy and industry have a significant effect on the returns of individual stocks. This approach emphasizes analyzing macroeconomic factors and industry trends before focusing on individual stocks.

Option A, "an underpriced stock can be found from technical analysis," is not aligned with the top-down, three-step approach. Technical analysis primarily focuses on historical price and volume patterns of individual stocks to predict future price movements. It does not consider macroeconomic or industry factors.

Option B, "political considerations are not relevant to stock values," is also inconsistent with the top-down, three-step approach. Political considerations, such as government policies, regulations, and geopolitical events, can have a substantial impact on the performance and valuation of stocks. Advocates of the top-down approach recognize the significance of these factors.

Option C, "the economy and industry have a significant effect on the returns of individual stocks," aligns with the top-down, three-step approach. This approach starts by analyzing the overall economy, including factors such as GDP growth, interest rates, inflation, and unemployment. It then assesses the industry or sector trends within the economy, such as supply and demand dynamics, competitive landscape, and technological advancements. Finally, the analysis narrows down to individual stocks within the chosen industry or sector.

Option D, "the economy and industry have little effect on the returns of individual stocks," contradicts the principles of the top-down, three-step approach. This approach explicitly recognizes the importance of macroeconomic and industry factors in determining the returns of individual stocks.

Therefore, the correct answer is C. The advocates of the top-down, three-step approach believe that the economy and industry have a significant effect on the returns of individual stocks.