The differences between top-down and bottom-up. Which is correct?
I thought that both 1 and 2 are correct. Bottom-up is faster at detecting turns, and bottom up is more optimistic that top down… Why is the answer 1? GRR!!!
You might very well think that… I couldn’t possibly comment
Agree with you. I got hit by this question as well.
top down would be more optimistic than bottom up when coming out of a recession. So B) is incorrect.
Think - top down is at the industry level. Industry level stuff may be all hunky dory - but individual companies within that may have been affected differently - so the bottom up would be less optimistic.
C) is definitely incorrect as well.
given the statement made for B above - cyclical turns would be detected slower by the top down method.
Kapaln B3 comment(p128):
For the Exam: The bottom line is that both top-down analysis and bottom-up analysis have strengths and weaknesses. Top-down analysis doesn’t incorporate the input of individual managers, while individual managers tend to be overly optimistic about their firm’s future. Be able to recognize the deficiencies of each method and discuss the implications.
Makes sense bottom-up tend to be more optimistic?
when the economy is doing well - they would be optimistic. likewise when the economy is doing bad - which is recession - they would be less optimistic. You need to look at both sides… if one applies (which is optimistic in this case as schweser has written - the opposite when a pessimistic scenario occurs would also apply by the same token).
in a top down - they start at the industry level - so they would be more optimistic than a bottom up estimate.
From the reading practice problems/answers:
[questions and answers removed by admin]
Seems like CFAI is contradicting itself. Or are we missing something?
This is straight out of the text. Top down is slower bc of the use of econometric models which may lag. Top down coming out of a recession are more optimistic bc mgrs (using bottom up) tend to exhibit recallability bias, anchoring/adjusting, and are weigh the recession too heavy compared with the future outlook.
Think of it this way, managers (who you assess from a bottom up perspective) overweight recent past events. If you are in a boom and hreading towards a recession, managers are too focused on the good times and are overly optimistic going into a recession. If you’ve just went through a recession, the bad times are on the manager’s minds and thus they are too pessimistic coming out of a recession into an expansion.
"Kapaln B3 comment(p128):
For the Exam: The bottom line is that both top-down analysis and bottom-up analysis have strengths and weaknesses. Top-down analysis doesn’t incorporate the input of individual managers, while individual managers tend to be overly optimistic about their firm’s future. Be able to recognize the deficiencies of each method and discuss the implications.
Makes sense bottom-up tend to be more optimistic?"
reading 17 in the CFA text says this as well. it also adds that a bottom up approach would be more likely to identify cyclical swings in production by aggregating individual companies’ inventory levels. As in, if inventories are piling up, the bottom up approach would inicate a downswing is coming. If inventories are scarce, but production is increasing, that would indicate an upswing. that’s why bottom up should be better at detecting cyclical changes.
Econometric models/ top down are not useful to forecast recessions.
Curriculum:
In practice, model-based forecasts rarely forecast recessions well, although they have a better record in anticipating upturns.
In short, into recession, both bottom up and top down don’t work!!!
I thought bottom up always optimistic than top down??? Analyst suffer from overly optimistic views of company’s management regarding company’s earnings prospects.
Or management still pessimistic even recession is over
Conclusion:
Bottom-up: overly emotional
Top-down: Slow to reflect structural chnages given based on historical data