sm14 - CHAPTER 14 INDUSTRY ANALYSIS Answers to Questions 1....

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INDUSTRY ANALYSIS Answers to Questions 1. The results of empirical studies concluded that there are substantial differences in absolute or relative performance among industries during any given time period. In addition, industry performance differences are found in alternative time periods where the time periods may vary in length. Therefore, the investor must examine alternative industries after he has forecasted market movements because of the wide dispersion of industry performance around the expected market performance. 2. Studies show that relative industry performance is inconsistent over time. When industries are ranked over successive time periods, there is little correlation in the rankings. This result holds for different types of markets and for alternative length time periods. These findings imply that simple extrapolation of past performance is not useful by itself. Therefore, the analyst must put additional effort into his industry analysis by projecting industry performance based upon future expectations of industry conditions. This obviously makes industry analysis more demanding. 3. A greater emphasis must be placed upon industry analysis when the performances of the individual firms cluster about the industry performance. In contrast, once the industry performance is estimated, the need for individual firm analysis is reduced since these results imply that all the firms will behave similar to the industry. 4. Disagree. Although studies have shown a significant dispersion of individual firm performance within a given industry, they also found that the industry component could partially explain individual firm performance. Although the strength of the industry component varies among industries, industry analysis is an important step before proceeding to the company analysis. The important implication is that individual company analysis would be relatively more important for industries where individual company returns are widely dispersed. The point is, the dispersion among companies within industries indicates a need for company analysis after industry analysis. 5. For given time periods, there were significant differences in risk among alternative industries. An analysis of Beta coefficients for the 30 Barron’s industry groups indicated a wide range of systematic risk. The substantial dispersion in risk for alternative industries implies that the analyst must examine the risk levels for alternative industries. 6. While there is substantial dispersion in industry risk during a given time period, studies indicate reasonably stable beta coefficients over time. This implies that past industry risk analysis may be useful in estimating future risk. 14 - 1
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This note was uploaded on 05/20/2010 for the course FIN 5DLS taught by Professor Leejohn during the One '10 term at La Trobe University.

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sm14 - CHAPTER 14 INDUSTRY ANALYSIS Answers to Questions 1....

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