Question

CAPE is preferred by some investors because 1 point a. P/E multiple can be distorted by...

CAPE is preferred by some investors because

1 point

a. P/E multiple can be distorted by one bad year

b. PEG has been used by many investors in Europe as a metric measure

c. It can be used for comparing firms across different industries

d. P/E multiple is not a good indicator of optimism

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Homework Answers

Answer #1

The correct option is Option A- P/E multiple can be distorted by one bad year

Explanation

CAPE is Cyclically adjusted Price to earnings ratio which takes out the effect of profits of company due to Seasonal changes. In normal Price to earnings ratio we use to divide Share price by earnings per share.

The 2 variables are used i.e Share price and  earnings per share. Due to any one bad year if anyone of the variable changes, there could be huge variable in this ratio msking this uncomparable.

So to make the ratio comparable, Some analyst uses CAPE.

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