Question

4. (a) The price of oil fell dramatically in 2015. What sort of macroeconomic shock would this be considered?

(b). What are the differences between Bottom-up and Top-down approaches in security valuation? What are the advantages of a Top-down approach?

(c). Define each of the following in the context of a Business cycle.

1. Peak
2. Contraction
3. Trough
4. Expansion

(d). In which phase of the business cycle would you expect the following industries to enjoy their best performance?

1. Newspapers
2. Machine Tools
3. Beverages
4. Timber.

Answer 1

(a) It was a Positive Supply Shock as the oil supply increased drastically and demand decreased as the vehicles became more efficient.

(b) In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors.

In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation.

Top down analysis includes analysis over economic growth , monetary policy , inflation and bond prices, It helps in diversification.

(c) Peak : It is the highest point in the business cycle. It is the turning point in the business cycle.

Contraction : It is the period after the peak and before the trough.

Trough : It is one of the turning point in the business cycle and is the lowest point in the cycle.

Expansion : The period after the trough.

(d) i) Newspaper : During early expansion

ii) Machine tools : During late expansion

iii) Beverages : During early expansion

iv) Timber : During contraction