Question

To follow a top down approach to creating an emerging market investment portfolio, you: a. first select the stocks that you wish to include based on their merits to outperform. b. include only the liquid, investable securities. c. none of the other choices are true d. first select the countries that you wish to include based on macroeconomic factors. e. first select the sectors that you wish to include based on their merits to outperform.

Answer 1

Correct option is D.

---> first select the countries that you wish to include based on macroeconomic factors.

Top down approach -

In this approach the financial analyst first forecasts for the economy, then for the industries, and finally for the companies.It is also referred as EIC framework. E stands for economy, I for industry and C for the company level analysis.

Before doing industry (sector) level analysis and firm level (company), In top down approach it is important to analyse the broad economic environment factors in which it operates such as GDP growth rate, inflation rate, interest rate, exchange rate etc.

Hope it clarifies!