Question

What are the differences between bottom-up and top-down approaches to security valuation? What are the advantages of a top-down approach?

Short answer

Answer

One attempts to move from specific to genral while the other moves from general to specific

Step-by-step solution

Step by Step Solution Step 1: Differences between bottom-up and top-down approaches to security evaluation

A top down approach attempts to move from big to small or general to specific such as global or domestic economy to sector and finally the specific company within the sector. The bottom up approach, on the other hand attempts to move from specific to general that is on specific company in the belief that these undervalued stocks will perform well regardless of the condition of economy.

Explanation on advantages of a top down approach

The biggest advantage of the top-down approach is the provision of structured approach to incorporate the impact of economic and financial variables into analysis of a company’s stock.