To identify an asset bubble, economists and analysts frequently rely on:
A) the price-earnings ratio.
B) the present discounted value of expected profits.
C) the current stock market price growth relative to average stock price growth.
D) a stock's "beta."
E) corporate annual reports.

Question

Quizplus · Accepted Answer

The price-earnings ratio is a common tool used to identify asset bubbles. This ratio measures the current stock price divided by its earnings per share. When the ratio is significantly higher than historical averages or industry averages, it suggests that the stock is overvalued and potentially in a bubble. High price-earnings ratios may indicate that investors are willing to pay a premium for expected future earnings, which may not necessarily materialize. Therefore, a high price-earnings ratio may signal a bubble in the making.

To Identify an Asset Bubble, Economists and Analysts Frequently Rely