{"id":1942,"date":"2019-06-15T17:35:00","date_gmt":"2019-06-15T17:35:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1942"},"modified":"2026-02-26T10:27:42","modified_gmt":"2026-02-26T10:27:42","slug":"industry-classification-systems","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/industry-classification-systems\/","title":{"rendered":"Industry Classification Systems"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which classification approach would group companies with strongly correlated stock price movements?\",\n    \"text\": \"Drof, a fictional company that manufactures and sells cars, and Snov, a fictional company that owns grocery stores across the United States, are grouped together using one classification approach. Drof\u2019s earnings are closely tied to the strength of the economy, while Snov\u2019s earnings are much less dependent on the business cycle. Despite these differences, the daily stock price movements of Drof and Snov over the last ten years have been strongly correlated.\\n\\nWhat classification approach is most likely to group these two companies together?\\n\\nA. Statistical similarities.\\n\\nB. Business-cycle sensitivities.\\n\\nC. Products and\/or services supplied.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"A. Statistical similarities.\\n\\nAlthough the companies differ in products and business-cycle sensitivity, their strongly correlated stock price movements indicate statistical similarity. Classification based on return correlations would therefore group them together.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"B. Business-cycle sensitivities.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"C. Products and\/or services supplied.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Introduction to Industry and Company Analysis (2025 Level I CFA\u00ae Exam \u2013 Equity \u2013 Module 5)\",\n  \"description\": \"This video lesson covers the CFA Level 1 Equity Investments topic on Industry and Company Analysis. It explores industry classification methods, business cycle sensitivity, strategic analysis, pricing power, life-cycle stages, macroeconomic and sector influences, and how to evaluate companies within a peer group for equity valuation.\",\n  \"uploadDate\": \"2022-05-12T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/labqtlwTF_c\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=labqtlwTF_c\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/labqtlwTF_c\",\n  \"duration\": \"PT41M53S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/labqtlwTF_c?si=GkvPiDUCN4WGRL1m\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>Industry classification attempts to place companies into groups based on commonalities. There are three major approaches to industry classification.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Current Industry Classification Systems<\/strong><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Commercial Industry Classification Systems<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Global Industry Classification Standard: <\/strong>developed by Standard &amp; Poor\u2019s and MSCI Barra. Each company is assigned to a sub-industry according to its principal business activity. Comprised of 154 sub-industries, 68 industries, 24 industry groups, and 10 sectors.<\/li>\n\n\n\n<li><strong>Russel Global Sectors: <\/strong>based on the products or services a company produces. Comprised of 141 industries, 32 subsectors, and 9 sectors.<\/li>\n\n\n\n<li><strong>Industry Classification Benchmark: <\/strong>jointly developed by Dow Jones and FTSE. Companies are categorized based on their primary source of revenue. Comprised of 114 subsectors, 41 sectors, 19 supersectors, and 10 industries.<\/li>\n<\/ul>\n\n\n\n<div style=\"margin:22px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n        display:block;\n        width:100%;\n        text-align:center;\n        padding:14px 0;\n        border:2px solid #2f5bea;\n        border-radius:40px;\n        text-decoration:none;\n        font-weight:500;\n        font-size:18px;\n        color:#2f5bea;\n        background-color:transparent;\n        box-sizing:border-box;\n     \">\n     Practice industry classification questions with our free trial.\n  <\/a>\n<\/div>\n\n\n<h3><strong>Description of Representative Sectors<\/strong><\/h3>\n<ul>\n<li><strong>Basic materials and processing: <\/strong>building materials, chemicals, paper, and forest products, containers and packaging, and metal, mineral, and mining companies<\/li>\n<li><strong>Consumer discretionary: <\/strong>cyclical consumer-related products or services<\/li>\n<li><strong>Consumer staples: <\/strong>non-cyclical consumer-related products or services<\/li>\n<li><strong>Energy: <\/strong>the exploration, production, or refining of natural resources<\/li>\n<li><strong>Financial services: <\/strong>banking, finance, insurance, real estate, asset management, and\/or brokerage services<\/li>\n<li><strong>Healthcare: <\/strong>medical products or supplies<\/li>\n<li><strong>Industrial\/producer durables: <\/strong>capital goods manufacturers and providers of commercial services<\/li>\n<li><strong>Technology: <\/strong>manufacturers or retailers of computers, software, semiconductors, and communications equipment<\/li>\n<li><strong>Telecommunications: <\/strong>communication services, sometimes grouped in with utilities<\/li>\n<li><strong>Utilities: <\/strong>electric, gas, water<\/li>\n<\/ul>\n<h3><strong>Governmental Industry Classification Systems<\/strong><\/h3>\n<ul>\n<li><strong>International Standard Industrial Classification of All Economic Activities (ISIC): <\/strong>adopted by the United Nations in 1948. Classifications are based on the principal type of economic activity the entity performs. Comprised of more than 400 classes, 233 groups, 88 divisions, 21 sections, 11 categories.<\/li>\n<li><strong>Statistical Classification of Economic Activities in the European Community:<\/strong> the classification of economic activities corresponding to ISIC at the European level. Classified based on the principal type of economic activity.<\/li>\n<li><strong>Australian and New Zealand Standard Industrial Classification (ANZSIC): <\/strong>jointly developed by the Australian Bureau of Statistics and Statistics New Zealand.<\/li>\n<li><strong>North American Industry Classification System (NAICS): <\/strong>jointly developed by the United States, Canada, and Mexico. NAICS distinguishes between an establishment (a single physical location where business is conducted) and an enterprise (more than a location performing economic activities).<\/li>\n<\/ul>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Drof, a fictional company that manufactures and sells cars, and Snov, a fictional company that owns grocery stores across the United States, are grouped together using one classification approach. Drof\u2019s earnings are closely tied to the strength of the economy, while Snov\u2019s earnings are much less dependent on the business cycle. Despite the differences, the daily stock price movements of Drof and Snov over the last ten years have been strongly correlated. What classification approach is the most likely to group these two companies together?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Statistical similarities.<\/li>\n<li data-tadv-p=\"keep\">Business-cycle sensitivities.<\/li>\n<li data-tadv-p=\"keep\">Products and\/or services supplied.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A.<\/strong><\/p>\n<p>The companies have few similarities in terms of products supplied or business-cycle sensitivities, but their statistical similarities would be likely to include them in the same group.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center; margin:42px 0 10px;\">\n\n  <div style=\"text-align:center; margin:28px 0 12px;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n     style=\"display:inline-flex; align-items:center; justify-content:center; padding:14px 26px; border-radius:12px; background:#1a73e8; color:#ffffff; text-decoration:none; font-weight:700; font-size:16px;\">\n    Start Free Trial \u2192\n  <\/a>\n<\/div>\n\n  <p style=\"\n        margin-top:16px;\n        max-width:680px;\n        margin-left:auto;\n        margin-right:auto;\n        font-size:16px;\n        line-height:1.5;\n     \">\n     Solve CFA-style equity questions and master industry classification frameworks and sector analysis.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Industry classification attempts to place companies into groups based on commonalities. There are three major approaches to industry classification. Current Industry Classification Systems Commercial Industry Classification Systems Practice industry classification questions with our free trial. Description of Representative Sectors Basic&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-1942","post","type-post","status-publish","format-standard","hentry","category-equity","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Industry Classification Systems | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn about major industry classification systems, their methodologies, and how they group companies based on common characteristics.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/industry-classification-systems\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Industry Classification Systems | CFA Level 1 - 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