Question

Question: for #3, the example provided does this relate to the second point more or is truly related to statistics? If it is, how so?

Industry classification is an attempt to place companies in a group based on their commonalities There are three major approaches to industry classification 1. Products and/or services supplied: This classification is usually based on its main business activity fromwhich the revenue is generated 2. Business Cvcle Sensitivities: Companies sometimes are classified as Cyclical or Non Cyclical based on its sensitivity towards business cycle. A cyclical company is one whose profits are strongly correlated with the strength of the overall economy and A non-cyclical company is one whose performance is largely independent of the business cycle 3. Statistical Similarities: Statistical approaches group companies based on the correlations of past securities' returns For Example: * Consumer discretionary: cyclical consumer- related products or services * Consumer staples: non-cyclical consumer- related products or services

Answer 1

The example given i.e. consumer discretionary and consumer staples, is more strongly related with the statistics. The reason is that the products that come under consumer discretionary are similar in nature and have a strong correlation among them. Similarly, the correlation among the consumer staples is also high. So, based on statistical simialrities, these examples are apt.