Question

What does a higher beta value indicate about a firm’s risk? How is the beta value related to the price-earnings (P/E) ratio

Answer 1

A beta of a stock indicate the stocks sensitivity/volatility to variation in market index. It is a measure of systematic risk of a stock and a higher beta indicates that the stock is highly sensitive to market varaition and if the beta of a stock is greater than 1, it implies the stock is riskier. Similarly lower beta implies the stock is less risker than the market.

P/E ratio is the markets willingness to pay for a stock compared to the current earnings in an anticipation of future cashflows.

Since stocks with higher beta is considered risky, the P/E ratio tend to be lower since market anticipates the stock to be risky. Similarly for lower beta stocks , the P/E ratio will be higher since market is willing to pay higher price due to its low risk.

note: These are theoretical explanations and in actual market you will be seeing many outliers due to local events.