Which of the following statements regarding sector indexes is most accurate?
Sector indexes:
A. track different economic sectors and cannot be aggregated to represent the equivalent of a broad market index.
B. provide a means to determine whether an active investment manager is more successful at stock selection or sector allocation.
C. apply a universally agreed upon sector classification system to identify the constituent securities of specific economic sectors, such as consumer goods, energy, finance, health care.
The correct answer is B.
However, the book did not explain why C is incorrect. I understand why A is wrong (should be "can be aggregated to represent…), and B is obviously right. Can someone explain why C is incorrect?
Sector classifications don’t have universally accepted definitions.
I have an Excel file with two sets of sector (and industry) classifications. One, for example, has Consumer Discretionary and Consumer Staples as distinct sectors while the other has merely Consumer Goods.
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Ok, I kind of get it. It confuses me since I am not sure what “universally agreed” means. I thought the universally agreed classification system here refers to the public (available online or even on the CFA books if I remember correctly…) If it is a personal classification system then I believe there are no universally accepted definitions. Thanks again! @S2000magician
My pleasure.
To be clear: these aren’t my personal classification systems. These are “official” classification systems that I found online. Unfortunately, I didn’t mark them with whose systems they are, but each is apparently a well known, fairly widespread classification.
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