The price/earnings ratio is affected by the amount of risk that investors are willing to take.

Question

Quizplus · Accepted Answer

The price/earnings ratio reflects the market's perception of a company's riskiness and growth prospects. A higher perceived risk will result in a lower price/earnings ratio, while a lower perceived risk will result in a higher price/earnings ratio. This is because investors demand a higher return for taking on higher risk. Therefore, the price/earnings ratio is affected by the amount of risk that investors are willing to take.

The Price/earnings Ratio Is Affected by the Amount of Risk