Question

It was found that firms with high P/E ratios, on average, earn higher returns than firms with low P/E ratios. True or False?

Answer 1

Price / Earning Ratio = Market Value price per shares / Eearning Per Shares

this ratio will represents the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings. Low P/E ratios will indicate ther is less earning and less dividend to the common share hokders and it will reduce the lower the market value of the shares.

So on average heigher P/E Ratio earn higher returns than firms with low P/E ratios

It means the given statement is true.

Answer = True