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All else equal, the forward-looking price-earnings multiple is related to risk and    related to growth....

All else equal, the forward-looking price-earnings multiple is related to risk and    related to growth. a) indirectly; directly, b) indirectly; indirectly, c) directly; directly, d) directly; indirectly?

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Answer #1

All else equal, the forward-looking price-earnings multiple is indirectly related to risk and directly related to growth.

Hence, Option (a) is correct.

  • The intuition for this is that investors would not be willing to pay a higher price for a very risky firm. For example, assume that a banking stock is on the verge of bankruptcy, making investment in its equity shares highly risky and investors would not prefer to invest in such stocks.
  • A company that has positive future aspects and high growth potential would likely be attractive to investors and would naturally have a higher price-earnings multiple. This makes the relation between the PE multiple and growth directly proportional.
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