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Top-Down Approach Bottom-Up Approach: BIG SYSTEM To Smaller Components Smaller Components To BIG SYSTEM

The document compares the top-down and bottom-up approaches to analyzing risk. The top-down approach analyzes risk by aggregating impacts of failures and is simple but not data-intensive. It does not differentiate between high and low severity events and is backward-looking. The bottom-up approach analyzes risk at the individual process level using models. It is complex and data-intensive, differentiates event severities, and is forward-looking.

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Maruf Ahmed
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41 views2 pages

Top-Down Approach Bottom-Up Approach: BIG SYSTEM To Smaller Components Smaller Components To BIG SYSTEM

The document compares the top-down and bottom-up approaches to analyzing risk. The top-down approach analyzes risk by aggregating impacts of failures and is simple but not data-intensive. It does not differentiate between high and low severity events and is backward-looking. The bottom-up approach analyzes risk at the individual process level using models. It is complex and data-intensive, differentiates event severities, and is forward-looking.

Uploaded by

Maruf Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Top-down Approach Bottom-up Approach

1. Top-down approach analyzes risk by 1. bottom-up approach analyzes the risks


aggregating the impact of internal in individual process using models
operational failures
2. Top-down approach doesnt 2. bottom-up approach does
differentiate between high frequency
low severity and low frequency high
severity events
3. Top-down approach is simple and not 3. bottom-up approach is complex as well
data intensive as very data intensive
4. Top-down approaches are backward- 4. bottom-up approaches are forward-
looking looking
5. BIG SYSTEM to smaller components 5. smaller components to BIG SYSTEM

MVA is the difference between the current market value of the firm and the capital
contributed by investors.

EVA is an estimate of a firm's economic profit. i.e., the profit earned by the firm less
the cost of financing the firm's capital

The firm's market value added, or MVA, is the discounted sum (present value) of all future expected
economic value added: MVA = Present Value of a series of EVA values.

Riskless Return According to CAPM, CML and SML are both half-lines that connect the risk-free
asset with the market portfolio.

CML is defined in expected return standard deviation (total risk) space.

SML is defined in expected return beta (systematic risk) space.

The CML is used in the CAPM model to show the return that can be obtained by
investing in a risk free asset, and the increases in return as investments are made in
more risky assets.
The security market is the representation of the CAPM model in a graphical
format. The SML shows the level of risk for a given level of return.

2.CML gives the risk/return relationship for efficient portfolios whereas SML , also part of the
CAPM, gives the risk/return relationship for individual stocks.
3.The measure of risk used in CML is standard deviation whereas in SML it is the beta
coefficient.

The Capital Market Line is considered to be superior when measuring


the risk factors.
Where the market portfolio and risk free assets are determined by the
CML, all security factors are determined by the SML.

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