For most firms,P/E ratios and risk
A)will be directly related.
B)will have an inverse relationship.
C)will be unrelated.
D)will both increase as inflation increases.
E)none of the above.

Question

Quizplus · Accepted Answer

P/E ratios and risk typically have an inverse relationship. A high P/E ratio usually indicates that investors have high expectations for a company's future earnings growth and are willing to pay a premium for its current earnings. However, this also means that the stock is more expensive relative to its earnings, which increases the risk for investors. On the other hand, low P/E ratios suggest that the stock may be undervalued and have less risk, but also may have lower expected earnings growth.

For Most Firms,P/E Ratios and Risk