Which conclusion presented by Ryan is most accurate.
Answer is Conslusion 1: The top-down approach is less optimistic when the economy is heading into a recession than the bottom-up approach.
Okay, i’m good with that answer and I agree
Fast forward to question 16:
Carmichael’s best answer to Schmidt’s question about a recommended forecasting approach is:
(schmidt’s question is the company wants to quickly detect significant cylical turns and minimize tracking errors)
I chose top-down as it would be more likely to show significanl cyclical turns and also satisfy the objective of miniming tracking errors.
The answer is: Both, which i find odd and contridictory to question 3’s answer
Here’s what the answer said about using bottom-up:
On the other hand, because the insurance company wants to detect quickly any significant turn in equity markets, Carmichael should recommend the bottom-up approach because the bottom-up approach can be effective in anticipating cyclical turning points. Is the part in bold correct? I could have SWORN the text explicity says the bottoms-up approach would likely lag top-down approach when cyclical changes in the market occur due to overly optimistic manager forecasts. Any help? I checked the errata and didn’t see a fix.
semantics aside, why is question 3 saying top-down approach is less optimistic about detecting cyclical turns versus top-down? Doesn’t that imply that top-down is better suited to detect a macro slowdown since it doens’t rely on manager’s seemingly biased forecasts?
It’s not intuitive that a bottom-up forecast would be a better methodology for quickly discovering cyclical changes in the overall equity market.
On page 160 of Book 3 (summary section of Equity Market Valuation) it says, “Top-down models can be slow in detecting cyclical turns if current statistical relationships between economic variables deviate significantly from their historical norms”
The question you reference specifically asks for “ quickly ” detecting changes (it’s in the last paragraph of the vignette), so I believe the description of top-down models as slow is what is relevant. It’s not a question of what is better or what is more optimistic or pessimistic b/c that’s not what he’s asking about in the last paragraph in the vignette. I agree it can be confusing.
I think Example 7 on page 144 of Volume 3 of the CFAI text may help to provide you with more background.
“If the belief exists that companies are reacting slowly to changes in economic conditions , then a market analyst may prefer a top-down forecast.” I think by refering to slow changes in economic conditions, the CFAI text is refering to equity markets that are not undergoing significant cyclical changes (i.e., the markets are stable).
“If the belief exists that the economy is on the brink of a significant change , then a market analyst may prefer the bottom-up forecast.” I think by “on the brink of a significant change”, the CFAI text is making reference to cyclical changes that may occur in the equity markets.
I have a question that i am not being able to solve. Can it be a top-down analysis fundamental? or only quantitative? In case yes, could you please provide and example?