CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
An analyst builds a revenue forecast for a retailer by extrapolating the last two years of strong growth, even though the industry is maturing. This behavior is most likely an example of:
The behavior is anchoring on recent results. The analyst fixes on the last two years of strong growth and projects it forward despite evidence that the industry is maturing. Mean reversion or scenario analysis would instead temper or vary the growth assumption.
- Aanchoring on recent resultsCorrect
- Bmean reversion in margins
- Cscenario analysis
Explanation
Relying heavily on the recent growth rate while ignoring evidence of industry maturity reflects anchoring (and recency) bias. Mean reversion would pull growth toward a long-run level, and scenario analysis would consider several outcomes rather than one extrapolated path.
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