The stop-down attain and Bottom-up attain are two long-established approaches that are outdated in repeat to measure operational possibility. Operation possibility is that style of possibility that arises out of operational mess ups such as mismanagement or technical mess ups. Operational possibility is also categorized into Fraud Likelihood and Model Likelihood. Fraud possibility arises because of the the shortage of controls and Model possibility arises because of the unsuitable mannequin software. Now, let’s watch at the stop-down attain and the bottom-up attain that is outdated in repeat to measures these style of dangers.

High-down Blueprint

In straightforward phrases, a top-down attain is an funding approach that selects varied sectors or industries and tries to enjoy a steadiness in an funding portfolio. The stop-down attain analyzes the danger by aggregating the affect of interior operational mess ups. It measures the variances within the commercial variables that are no longer explained by the exterior macro-financial components. As such, this attain is easy and no longer data-intensive. The stop-down attain relies mainly on historical data. This attain is reverse to bottom-up attain.

Bottom-up Blueprint

A bottom-up attain, on the other hand, is an funding approach that relies on the selection of particular particular person shares. It observes the performance and administration of companies and no longer favorite financial dispositions. The bottom-up attain analyzes particular particular person possibility within the assignment by the employ of mathematical models and is thus data-intensive. This device does no longer depend upon historical data. It is a ways a ahead-wanting attain now not just like the stop-down mannequin, which is backward-wanting.

[Related read: Risk Management Strategies]


Variations between High-down Blueprint and Bottom-up Blueprint

  • The stop-down attain analyzes possibility by aggregating the affect of interior operational mess ups while bottom-up attain analyzes the hazards in an particular particular person assignment the employ of models.
  • The stop-down attain doesn’t differentiate between excessive-frequency low severity and low-frequency excessive severity occasions while the bottom-up attain does.
  • The stop-down attain is easy and no longer data-intensive whereas bottom-up attain is complex apart from very data-intensive.
  • High-down approaches are backward-wanting while bottom-up approaches are ahead-wanting.

These are the basics of the stop-down attain and the bottom-up attain. 

See this video on Likelihood Management Fundamentals