A rising P/E ratio could be explained by:
A)a decline in the Dow Jones Industrial Average.
B)an increase in inflation.
C)a fall in expected earnings.
D)irrational exuberance.

Question

Quizplus · Accepted Answer

A rising P/E ratio is often associated with investor optimism (or irrational exuberance), as they may be willing to pay a higher price for the same earnings. An increase in inflation (choice B) may actually decrease the P/E ratio, as it reduces the present value of future earnings. A decline in the Dow Jones Industrial Average (choice A) or a fall in expected earnings (choice C) would likely cause a decrease in the P/E ratio as investors become less optimistic about the company's future prospects.

A Rising P/E Ratio Could Be Explained By