Shown below is a correlation table showing correlation coefficients between stock price, earnings per share (EPS) and price/earnings (P/E) ratio for a sample of 19
Publicly traded companies. Which of the following statements is false?
A) EPS is the best predictor of stock price.
B) The strongest correlation is between EPS and stock price.
C) There is a weak negative association between PE and EPS.
D) PE is the best predictor of stock price.
E) The weakest correlation is between PE and EPS.

Question

Shown below is a correlation table showing correlation coefficients between stock price, earnings per share (EPS) and price/earnings (P/E) ratio for a sample of 19
Publicly traded companies. Which of the following statements is false? 
A) EPS is the best predictor of stock price. 
B) The strongest correlation is between EPS and stock price. 
C) There is a weak negative association between PE and EPS. 
D) PE is the best predictor of stock price. 
E) The weakest correlation is between PE and EPS.

Quizplus · Accepted Answer

The false statement is A) EPS is the best predictor of stock price. The strongest correlation is between EPS and stock price, but that doesn't mean it's the best predictor. The correlation coefficient between PE and stock price is actually slightly higher than the correlation coefficient between EPS and stock price, meaning that PE is a better predictor of stock price than EPS. Additionally, there is in fact a weak negative association between PE and EPS indicated by the correlation coefficient of -0.20.

Shown Below Is a Correlation Table Showing Correlation Coefficients Between