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CA Final · Advanced Financial Management · Security Analysis

Which of the following best describes the top-down approach in fundamental analysis?

The top-down approach starts with the economy, moves to industry analysis and finally selects the individual company. This economy-industry-company sequence is the standard framework of fundamental analysis; beginning with company data is the bottom-up approach.

  1. AStart with company financial ratios, then assess the industry and finally the economy
  2. BStart with the economy, then analyse the industry, and finally select the companyCorrect
  3. CStart with price charts of the stock, then confirm using volume trends
  4. DStart with the portfolio beta and then pick stocks matching it

Explanation

Fundamental analysis in its top-down form is an EIC framework: economic analysis first, then industry analysis, then company analysis. Starting from company ratios is the bottom-up approach. Chart-based analysis is technical analysis.

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