Question

Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices. Which of the following statements in relation to the bottom-up approach to share price analysis is MOST correct? The bottom-up approach: Select one:

a. identifies the level of systematic risk within industry sectors.
b. is applied to select specific firms from within desired industry sectors.
c. indicates a well-diversified portfolio that eliminates unsystematic risk.
d. provides investment indicators based on forecast financial ratios.

Answer 1

Option b is the most correct. The bottom-up approach to share price analysis involves a detailed evaluation of individual companies, selecting specific firms that show promise despite any current negative outlooks.

Step-by-step explanation:

The bottom-up approach to share price analysis involves detailed analysis of individual companies rather than focusing on industry trends or economic forecasts. This method emphasizes the evaluation of a company's fundamentals, such as its financial health, management quality, and market position to make investment decisions. Among the given options, the most correct statement related to the bottom-up approach is that it:

b. is applied to select specific firms from within desired industry sectors.

Analysts who utilize the bottom-up approach concentrate on specific companies' potential, regardless of industry-wide trends or macroeconomic factors. They believe that it's possible to find 'shining stars'—companies that may currently have poor outlooks but are poised for future success. In contrast, the top-down approach begins with macroeconomic and industry-sector analysis before considering individual stocks.