Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an anomaly?
A) Low P/E stocks tend to have higher risk than high P/E stocks.
B) Low P/E stocks are temporarily out of favor but may have strong prospects.
C) The low P/E effect contradicts the Efficient Market Hypothesis.
D) Low P/E stocks are often weak companies.

Question

Quizplus · Accepted Answer

The low P/E effect contradicts the Efficient Market Hypothesis because, according to the hypothesis, all available information should already be reflected in stock prices, and there should be no systematic way to achieve higher returns without taking on additional risk.

Research Suggests That Low P/E Stocks Outperform High P/E Stocks