Question12 Under the top-down approach to fundamental analysis, analysts begin their assessment by examining: I. Inflation ratesII. Dividend payout ratios of the companyIII. Industry averages of debt-to-equity (D/E) ratioIV. Gross domestic productV. Trading volumes of that stock in the share marketVI. Balance of paymentsVII. Past and future price-to-earnings (P/E) ratios of the company I, IV and VI I, II, IV and V II, V and VII II, III, V and VII I, II, IV and V ResetMaximum marks: 1 Flag question undefined

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Question12 Under the top-down approach to fundamental analysis, analysts begin their assessment by examining: I. Inflation ratesII. Dividend payout ratios of the companyIII. Industry averages of debt-to-equity (D/E) ratioIV. Gross domestic productV. Trading volumes of that stock in the share marketVI. Balance of paymentsVII. Past and future price-to-earnings (P/E) ratios of the company I, IV and VI I, II, IV and V  II, V and VII II, III, V and VII I, II, IV and V  ResetMaximum marks: 1 Flag question undefined

BlackTom AI · Accepted Answer

To tackle this question, we must first understand what a top-down approach to fundamental analysis entails. In a top-down framework, analysts typically start by looking at macro-level indicators and broad economic factors before narrowing down to industry and company specifics. Now, let's evaluate each answer choice by considering which items are most consistent with the top-down sequence.
Option A: I, IV and VI (Inflation rates, GDP, Balance of payments). This combination aligns with macroeconomic indicators that investors often examine at the outset of a top-down analysis. Inflation rates (I) provide context on price level changes and central bank stance; GDP (IV) reflects overall economic growth; Balance of payments (VI) offers insight into a country’s international economic position. Together, they form a plausible starting set for macro-level assessment.
Option B: I, II, IV and V (Inflation rates, Dividend payout ratios, GDP, Trading volumes). Here, including dividend payout ratios (II) and trading volumes (V) moves into company or market micro aspects, which are not typically the starting focus of a top-down macro-first approach. While inflation and GDP may be relevant, dividends and volume are more company- or market-specific metrics that usually appear after broad macro and industry considerations.
Option C: II, V and VII (Dividend payout ratios, Trading volumes, Past and future P/E ratios). This set emphasizes company-specific or market-trading metrics without any macroeconomic or industry context. Under a strict top-down method, we would expect macro indicators first, so this option misplaces the emphasis toward micro factors too early.
Option D: II, III, V and VII (Dividend payout ratios, Industry debt-to-equity averages, Trading volumes, Past and future P/E ratios). While adding industry metrics (III) is relevant at a subsequent stage, the presence of dividend payout ratios and P/E ratios alongside trading volumes again indicates a focus on company or market specifics prematurely, rather than starting with macro indicators.
Option E: I, II, IV and V (Inflation rates, Dividend payout ratios, GDP, Trading volumes). This option mixes macro indicators (I and IV) with company-focused items (II and V). The inclusion of dividend payout ratios in a top-down sequence is inconsistent with the traditional starting emphasis, which would prioritize macro factors before moving to industry and company specifics. It also omits Balance of payments (VI), which is a broader macro variable that could be part of the initial macro scan alongside inflation and GDP.
Overall, the best alignment with a top-down approach is obtained by starting with macroeconomic indicators like inflation, GDP, and other broad macro metrics such as the balance of payments, before advancing to industry and company specifics. Among the options, I, IV and VI best reflect that macro-first orientation, while the other choices introduce micro or market-specific elements too early or omit key macro signals.

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