Financial Education

The top down approach to security selection is described in Investment Analysis and Portfolio Management (with Thomson ONE - Business School Edition) as a three-step process.

1. Analysis of alternative economies and securities markets to decide how to allocate investments among countries, and within countries to asset classes such as stocks, bonds or cash.
2. Analysis of alternative industries, based on the results of the market analysis. Which industries are likely to prosper or do poorly, both globally and on a country by country basis?
3. Analysis of individual companies and stocks, based on the results of the first two steps. The final objective is to select the best securities in the industries most likely to benefit from economic trends.

Studies have shown significant relationships between a stock’s earnings and aggregate industry or market earnings. Other studies have demonstrated relationships between stock performance and economic data series. Significant portions of total return can be attributed to industry and market effects as well. These findings offer support for the top-down approach to security selection.

For more information, see all articles on: Security Selection

See also:

Approaches to Security Selection

The Effect of Asset Allocation on Portfolio Performance

Core-Satellite Approach to Equity Manager Selection

Micro Performance Attribution: Fundamental Factor Model

Approaches to Equity Investment