top down and bottom up approach

hey guys

can u tell me the difference between top down and bottom up aproach ???

top down=69 bottom up=doggy

from the little i understand, top down is when you look at the forest and estimate the health of an individual tree (like in deduction). bottom up is when you just examine the tree thoroughly without considering much else (like in induction). for example, we could examine the stock of two hypothetical companies: company A produces ugly-looking but gas-efficient cars, company B produces good-looking cars that are not as gas efficient as the other. TOP-DOWN APPROACH – if we expect a prolonged period of good economic growth and increase in the disposable income of individuals, then most individuals wouldn’t mind buying the good-looking cars they like eventhough such cars are not as fuel efficient as the ugly-looking ones. therefore company B’s stock would be expected to perform better than A’s, all else being equal. company A’s stock would be expected to outperform B’s stock in a prolonged bad economic activity because there isn’t enough money to spend on gas, plus a lot of individuals would probably have to commute longer distances to low-paying jobs. BOTTOM-UP APPROACH – just examine thoroughly the financial statements, management team, etc. of both companies to estimate performance. this is an over-simplification but i hope you get it

Top down analysis is analyzing from the broader variables like GDP, Industry growth, overall economic conditions etc. and then coming down to the securities while analyzing individual stocks, portfolios or index etc is an example of bottom up approach. For instance if you want to invest obviously first you’ll choose the economy or the sector this is top down and then you’ll choose for securities that would diversify the portfolio it will be bottom up approach. CFA knowledge is more likely to be used in bottom up approach.