Canadian Securities Course (CSC) Level 2 Practice Exam

Which strategy in equities focuses on prospects for the overall economy rather than individual stocks?

1. Bottom-up strategy

2. Value investing strategy

3. Sector rotation strategy

4. Top-down strategy

The correct answer is: Top-down strategy

The top-down strategy is centered on analyzing macroeconomic factors and their effects on financial markets as a whole, rather than focusing on the performance of individual companies. Investors who utilize this approach first look at the overall economy, assessing factors such as GDP growth, interest rates, inflation, and employment figures. Based on this broader analysis, they then determine which sectors or industries are expected to perform well before identifying specific stocks within those sectors. This strategy is beneficial because it aligns investment decisions with larger trends and forecasts in the economy, allowing investors to capitalize on regional or industry-wide growth or decline. In contrast, approaches like the bottom-up strategy focus on analyzing individual companies and their fundamentals without regard to external economic conditions. Similarly, value investing generally seeks undervalued stocks, which may or may not be influenced by the current economic climate. The sector rotation strategy does consider broad economic conditions but is primarily about shifting investments between sectors rather than focusing on the overall economic landscape to the same extent as the top-down approach.