CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
An analyst groups companies into peer sets using a commercial industry classification system. Which feature of the approach is most likely to be a limitation?
The most likely limitation is that diversified companies may be placed in only one category. Commercial systems classify a firm by its principal business activity, so firms with several business lines are only partly represented by that group, which can distort peer comparisons.
- ACompanies are grouped by their principal business activity
- BDiversified companies may be placed in only one categoryCorrect
- CClassifications are updated by the provider
Explanation
Commercial classification systems typically assign a company to a single group based on its principal activity, usually its largest source of revenue or earnings. A diversified company with several business lines is therefore only partly represented by its assigned peer group. Grouping by principal activity and periodic updates are features of the approach, not limitations.
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