Reading 15_Equity Market Valuation_Practice Problems_Q12&16

The answer for Q12 states that “A higher correlation of the US equity market with international equity markets would increase the risk of the US equity market”

The answer for Q16 states that “bottom-up approach can be effective in anticipating cyclical turning points”

Could anyone explain why it is the case for each of the question? If possible, pls give your reference from the readings. Thanks.

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higher correlation = both are moving lock step with each other. They are moving in the same direction together. That increases the risk level if you invest in the US Equity market.


a firm inside an industry is better capable of judging where it is. When you do the bottom up approach and take all the individual firms and then perform an aggregate on them - you can better determine what the true picture is.