Studies of the relationship between P/E ratios and stock returns have found that
A) Low P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
B) Low P/E stocks of small cap stocks outperformed high P/E stocks of large cap stocks.
C) High P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
D) High P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks.
E) None of the above.

Question

Quizplus · Accepted Answer

Studies have found that low P/E stocks of small cap stocks tend to outperform high P/E stocks of large cap stocks. This is because small cap stocks have greater potential for growth and therefore their earnings are more likely to increase, leading to increasing stock prices. Additionally, low P/E ratios suggest that a stock is undervalued, and as investors recognize the potential for growth, the stock price is likely to increase.

Studies of the Relationship Between P/E Ratios and Stock Returns