Investors are willing to pay a higher price-earnings ratio for growth stocks than for income stocks.

Question

Quizplus · Accepted Answer

Growth stocks are expected to grow at an above-average rate compared to other companies, leading investors to pay a higher price-earnings ratio in anticipation of future earnings increases, whereas income stocks typically offer steady dividends but slower growth, justifying a lower price-earnings ratio.

Investors Are Willing to Pay a Higher Price-Earnings Ratio for Growth