Bottom Up Approach

See Also:
Top Down Approach
How to Prepare an Investor Package
Fixed Income Securities
Common Stock Definition
Finance Beta Definition

Bottom Up Approach Definition

The bottom up approach definition is when the investing involves picking out certain securities based on how the security is priced. Bottom up approach also involves looking at the potential return and risk associated.

Bottom Up Approach Explained

Unlike the top down approach, bottom up approach finance does not involve any asset allocation across industries or countries. It rather looks solely at the stock or debt and whether or not that particular security can provide a return. Bottom up approach management can contain several disadvantages because it ignores asset allocation. First, it is possible that an investor might invest solely in one industry. This is hardly a well diversified portfolio and the entire portfolio would fluctuate with that industry. Some bottom up approach advantages are that it does seek out the most attractive investment opportunities in the current marketplace.

Bottom Up Approach Example

Look at the following bottom up approach example. Dwight is looking to invest some money on hand in several securities that will provide him the best return. He decides that he would like to earn a return of 12% on the year with a deviation of 10%. He finds two securities that he believes will provide him this return. Stock A has an expected return of 14% and a standard deviation of 12%, and stock B with an expected return of 10% and a standard deviation of 8%. By combining these two stocks in a portfolio Dwight is able to earn the return he desires. It should be noted however that it is unclear whether these two stocks are in the same industry. If they were Dwight may be taking on more risk than the 10% of deviation he expects.
If you want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.
Bottom Up Approach Definition, Bottom Up Approach Example, bottom up approach
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Bottom Up Approach Definition, Bottom Up Approach Example, bottom up approach

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

September 12-15th 2022