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

question 58

Multiple Choice

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.

---

Definitions:

Coupon Rate

The annual interest rate paid by a bond's issuer to its bondholders, expressed as a percentage of the bond's face value.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity which constitutes how a company finances its overall operations and growth.

Indifference EBIT

Indifference EBIT (Earnings Before Interest and Taxes) is the level of EBIT where a company is indifferent between different financial options or structures, as each would result in the same earnings.

Interest

The cost of borrowing money, typically expressed as an annual percentage of the principal.