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Basic Question 4 of 4
Which of the following statements is (are) true with respect to the valuation process of a security?
II. Qualitative factors such as manager's integrity cannot be built into the valuation models like quantitative factors can.
III. Holding everything else constant, the firm with a higher quality of earnings, would likely have a lower required rate of return.
IV. A top-down approach is much more effective than a bottom-up approach in valuing securities.
I. One of the differences between the top-down approach and the bottom-up approach is that with the former, the firm forecast is actually an input item.
II. Qualitative factors such as manager's integrity cannot be built into the valuation models like quantitative factors can.
III. Holding everything else constant, the firm with a higher quality of earnings, would likely have a lower required rate of return.
IV. A top-down approach is much more effective than a bottom-up approach in valuing securities.
User Contributed Comments 8
| User | Comment |
|---|---|
| Masterkang | IV is just the opinion of the CFA institute. There are many great investors out there who are proponents of the bottom-up approach, notably Warren Buffett or Peter Lynch. |
| AusPhD | Couldn't agree more Masterkang |
| elbaker | This is by far the stupidest question I have ever read regarding the CFA material. While I am not some botom-up Buffett follower, to suggest that the top-down is more effective than bottom-up is very presumptious of the CFA institute. I don't want to learn CFA institute opinions, I want factual material. I am not blaming analystnotes here as it follows CFA Institute study guide. |
| SageofOmaha | who dare to deny the sage of omaha? |
| giroth | When a question says something like "qualitative factors cannot be built into a model" I take the question at face value, i.e., how do I literally quantify the integrity of management in my model? Answer: I don't, I adjust qualitatively in the discount rate or something. |
| qwsx | Ans is right becz firm forcase should be made on the basis of industry so top down as here industry inouts and estimates are used for making estimates about firm performance. In bottom up company estimates are inputed to estimate industry performance which seems only totally wrong so i dnt understand y so many pple have problem with CFA institute opinion.Its totally logical and rational. |
| charomano | Both approaches could serve what we call "a good analysis" if we a acheive our goal. But if we look broadly, we notice investors are more comfortable with the top-down approach. So let us say that it is "more conservative" "less risky" better than "more effective". CFA intends not to go further into discussion so that's why it used an"end of discussion" expression. |
| ashish100 | Lol never seen sageofomaha before. Popped up outta no where as soon as some shit on bottom up analysis I agree tho. CFA gonna mint even more bums who can't beat the market with that advice. |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
describe questions that should be addressed in conducting an industry and competitive analysis;
CFA® 2025 Level II Curriculum, Volume 3, Module 20.