Studies of the relationship between P/E ratios and stock returns have found that
A) low P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
B) low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks.
C) high P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
D) high P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks.
E) low P/E stocks of small cap stocks equaled the performance high P/E stocks of large cap stocks.

Question

Quizplus · Accepted Answer

Studies have found that low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks. This is because small cap stocks are often undervalued and have greater growth potential, while large cap stocks have already reached their growth potential and may be overvalued. Additionally, many investors may overlook small cap stocks, leading to lower demand and lower prices, which can provide buying opportunities.

Studies of the Relationship Between P/E Ratios and Stock Returns