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CFA Level I · CFA Level I Exam · Equity Analyst Research Reports

Two analysts at different firms both issue Buy ratings on the same stock, but one firm uses a relative-rating scheme and the other an absolute-return scheme. Which statement is most accurate?

A relative-scheme Buy means the stock is expected to outperform a benchmark or peers, whereas an absolute-scheme Buy means expected total return exceeds a stated threshold. The same label therefore need not imply the same expected return, and both are forward-looking.

  1. AThe relative scheme's Buy means the stock is expected to outperform a benchmark or peer group, while the absolute scheme's Buy refers to expected total return exceeding a thresholdCorrect
  2. BBoth Buy ratings must imply the same expected total return
  3. CThe absolute scheme's Buy is based on past returns rather than expected returns

Explanation

Relative schemes rate a stock against a benchmark or peer group, so a Buy can coexist with a modest or negative absolute return in weak markets. Absolute schemes use an expected-return threshold. Ratings are forward-looking, and identical labels do not imply identical returns.

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