Which of the following is a market anomaly?
A)A relationship between money supply growth and stock prices.
B)A relationship between P/E ratios and subsequent stock returns.
C)Independence of stock price changes.
D)Adjustment of stock prices due to accounting changes.

Question

Quizplus · Accepted Answer

A relationship between P/E ratios and subsequent stock returns is considered a market anomaly because it suggests that stock prices do not always accurately reflect a company's current or future earnings potential. In traditional finance theory, higher P/E ratios should indicate expected higher future earnings, leading to higher stock prices. However, empirical evidence shows that there is often an inverse relationship between P/E ratios and subsequent stock returns. This anomaly has sparked debate among academics and practitioners about the efficiency of the stock market and the usefulness of traditional valuation metrics. The other options (A, C, and D) do not necessarily represent anomalies, as they are all factors that can influence stock prices in expected ways.

Which of the Following Is a Market Anomaly