Search icone
Search and publish your papers

Top-down or bottom-up valuation process?

Or download with : a doc exchange

About the author

ING Group Greece - Sidma SA - Telesis Securities
Level
Advanced
Study
MBA...

About the document

Published date
Language
documents in English
Format
Word
Type
presentations
Pages
6 pages
Level
Advanced
Accessed
3 times
Validated by
Committee Oboolo.com
0 Comment
Rate this document
  1. Abstract.
  2. Introduction.
  3. Determining asset value.
    1. Estimating future stream of cash flows.
    2. Estimating discount rate.
  4. The top-down, three step valuation approach.
    1. Economic environment.
    2. Industry environment.
    3. Company Analysis.
  5. The bottom-up, stock-picking approach.
  6. Top-down or bottom-up valuation process?
  7. Conclusions.

Investors typically select investments that provide a rate of return, which compensates them for their time, the expected rate of inflation and the risk involved. In this context, the value of an investment is estimated based on the required rate of return, which is calculated using either the top-down, three-step approach or the bottom-up, stock-picking approach. This paper investigates and compares the top-down and the bottom-up valuation approaches in relation to the investment decision process. Both approaches are used to estimate the rate of return and may be equally used by advocates of fundamental and technical analysis. However, the paper concludes that the top-down, three-step valuation approach is preferable because it considers the aggregate economy and market, it examines global industries and it analyzes individual firms in order to determine the value of the stock.

Keywords: valuation process, top-down valuation approach, bottom-up valuation approach

[...] Estimating future stream of cash flows A cash flow stream is a finite set of payments that an investor will receive or invest over time. The present value of the cash flow stream is equal to the sum of the present value of each of the individual cash flows in the stream. n PV = ? [CFt / t=0 where: PV = the Present Value of the Cash Flow Stream CFt = the cash flow which occurs at the end of year t r = the discount rate t = the year, which ranges from zero to n n = the last year in which a cash flow occurs. [...]


[...] On the other hand, the bottom-up valuation process is challenged by research studies, which assert that it requires superior stock-picking skills in order to identify undervalued stocks among so many stocks that trade around the globe (Mikhail, Walther, Wang & Willis, 2006). The reason is because a lot of the information provided about stocks is not measurable and therefore it cannot be evaluated. Managerial effectiveness is reflected in a firm's fundamentals, i.e. the quantifiable aspects of firm. However, investors need to get information on a firm's qualitative aspects as well, such as competitive advantage, and employee performance, in order to assess if a firm can remain viable in the future. [...]


[...] On the other hand, the bottom-up valuation process is challenged as it requires superior stock-picking skills in order to identify undervalued stocks. In addition, the psychological factors and cognitive biases of investors can lead markets off-center. Conclusively, the top-down, three-step valuation approach is preferable valuation approach because it is not subject to subjective preferences and plain figures. By considering the aggregate economy and market, examining global industries and analyzing individual firms, it determines the value of a security based on market consensus rather than on the individual traits of investors. [...]

Similar documents you may be interested in reading.

Risk management in the asset management industry (risk measurement techniques): An evaluation of...

 Economics & finance   |  Finance   |  Research papers   |  05/09/2009   |   .doc   |   112 pages

Uncertainty management processes- (Collective cases from Hydro)

 Business & market   |  Management   |  Case study   |  01/22/2013   |   .pdf   |   115 pages

Top sold for finance

Yale University Investments Office: August 2006 case analysis

 Economics & finance   |  Finance   |  Case study   |  08/17/2009   |   .doc   |   8 pages

Company budgeting

 Economics & finance   |  Finance   |  Term papers   |  06/21/2010   |   .doc   |   4 pages