Skip to content

CFA Level I · CFA Level I Exam · The Firm and Market Structures

Two industries each have a four-firm concentration ratio of 80%. In Industry X the four firms each hold 20%. In Industry Y one firm holds 65% and three firms hold 5% each. Which statement is most accurate?

Industry Y has the higher HHI, about 4,300 versus 1,600 for X, even though both four-firm ratios equal 80%. The concentration ratio ignores how shares are distributed among the leading firms, so it understates Y's market power relative to X.

  1. ABoth industries have the same HHI because the ratios are equal
  2. BIndustry Y has a higher HHI, so the ratio understates its concentration relative to XCorrect
  3. CIndustry X has a higher HHI because its leading firms are equal in size

Explanation

HHI of X from the four firms = 4 × 400 = 1,600. HHI of Y from the four firms = 4,225 + 3 × 25 = 4,300. The N-firm ratio ignores the distribution of shares among the leaders, while the HHI captures it, so Y is far more concentrated despite the equal ratios.

Did you get it right without looking?

One question tells you little. A timed set on The Firm and Market Structures shows your real accuracy, how long you take and where you lose marks.

Practise The Firm and Market StructuresFree diagnostic mock

More The Firm and Market Structures questions