Investment Analysis Process

Identifying Promising Investments: A Macro to Micro Approach

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Question

Jim Williams, a security analyst with Smith, Kleen & Beetchnutty, identifies promising investments by first evaluating the global macroeconomic environment, then identifying the prospects of individual regions and companies. Once promising areas have been identified, Mr. Williams then determines which industries are expected to flourish within these areas. Finally, individual companies are examined within the aforementioned industries. Which of the following best describes the process used by Mr. Williams?

Answers

A. None of these answers is correct.

B. Macroeconomic Cycle Approach

C. Sensitivity Analysis Approach to security evaluation

D. Top down Approach

E. Bottom up Approach

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Explanations

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A. B. C. D. E.

The approach illustrated within this example is the Top Down, or "Macro" approach. When using this method, an analyst first begins by evaluating the macroeconomic environment, and then moves on to specific regions and countries. Next, individual industries are examined in an attempt to determine their fundamentals. The final step in the Top Down Approach is to examine individual companies.

The Top Down Approach is contrasted with the Bottom Up Approach, which begins by evaluating the fundamentals of individual companies.

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