The P/E ratio is a multiple of earnings that investors pay for a stock. The P/E is __________ related to growth, __________ related to the discount rate, and __________ related to the stock's risk.
A) positively; positively; negatively.
B) negatively; positively; positively.
C) positively; negatively; negatively.
D) negatively; negatively; positively.

Question

Quizplus · Accepted Answer

The P/E ratio is positively related to growth because higher expected growth rates typically lead to higher P/E ratios. It is negatively related to the discount rate because higher discount rates (reflecting higher interest rates or required returns) reduce the present value of future earnings, thus lowering the P/E ratio. Lastly, it is negatively related to the stock's risk because higher risk decreases the stock's attractiveness, leading to a lower P/E ratio.

The P/E Ratio Is a Multiple of Earnings That Investors