Which of the following descriptions of the price/earnings ratio is the most accurate?
A)Investors are generally more pessimistic about the prospects for high P/E stocks.
B)Historically,the average P/E for the market as a whole has been approximately 10.
C)Companies with high growth rates generally have higher P/E ratios.
D)All else the same,investors prefer to purchase stocks with relatively high P/E ratios.

Question

Quizplus · Accepted Answer

The price/earnings ratio (P/E ratio) measures a company's current stock price relative to its per-share earnings. Option C is the most accurate description because companies with high growth rates are expected to have higher earnings in the future, so investors are willing to pay more for those earnings today, which translates to a higher P/E ratio. Additionally, options A, B, and D are not accurate. Option A is incorrect because investors are generally more optimistic about high P/E stocks with potential for growth, while low P/E stocks may be viewed as undervalued or riskier. Option B is incorrect as the historical average P/E for the market varies, but is typically higher than 10. Option D is incorrect because investors may choose to buy stocks with lower P/E ratios if they believe they are undervalued or have greater potential for future growth.

Which of the Following Descriptions of the Price/earnings Ratio Is