The price to earnings ratio, also called the P/E ratio of a stock, is a measure of the price of a share relative to the annual net income per share earned by the firm. Suppose the P/Es for a firm's common stock during the past four quarters are 10, 12, 15, and 11, respectively. The standard deviation of the P/E ratio over the four quarters is ________.
A) 1.87
B) 2.16
C) 3.50
D) 4.67

Question

Quizplus · Accepted Answer

The standard deviation is calculated by finding the square root of the variance. First, calculate the mean (average) P/E ratio: (10 + 12 + 15 + 11) / 4 = 12. Then, find the variance by averaging the squared differences from the mean: [(10-12)^2 + (12-12)^2 + (15-12)^2 + (11-12)^2] / 4 = [(4) + (0) + (9) + (1)] / 4 = 14 / 4 = 3.5. The standard deviation is the square root of 3.5, which is approximately 1.87.

The Price to Earnings Ratio, Also Called the P/E Ratio