A diversified financial conglomerate has five units (subsidiaries). One unit conducts thrift operations; the second unit conducts consumer finance operations; the third, mutual fund operations; the fourth, securities operations; and the fifth, insurance operations. As a financial analyst for the conglomerate's holding company, you have beenasked to assess all of the units and to indicate how each unit will be affected as economic conditions change as well as which units will be most affected.

In the past few months, all economic indicators have been signaling the possibility of a recession. Stock prices have already declined as the demand for stocks has decreased significantly. It appears that the pessimistic outlook will last for at least a few months. Economic conditions are already somewhat stagnant and are expected to deteriorate further in future months. During that time, firms will not consider mergers, new stock issues, or new bond issues.

An economist at your financial conglomerate believes that individual investors will overreact to the pessimistic outlook. Once stock prices are low enough, some firms will acquire target firms whose stock appears to be undervalued. In addition, some firms will buy back some of their own stock once they believe it is undervalued. Although these activities have not yet occurred, the economist believes it is only a matter of time.

a.Your strategy is to identify the units that will be less adversely affected by the recession. You believe that the units' different characteristics will cause some of them to be affected more than others.

b.Currently, each unit employs economists who develop forecasts for interest rates and other economic conditions. When assessing potential economic effects on each unit, what are the disadvantages of this approach versus having just one economist at the holding company provide forecasts?