What Is the 1/X Problem as It Applies to Averaging

question 41

Multiple Choice

What is the 1/X problem as it applies to averaging P/E ratios?

• A)It refers to the fact that a P/E ratio may not make sense when a firm's earnings are very small, and including such firms when calculating an industry average can result in an
• Invalid comparison P/E.
• B)It refers to the fact that it may be difficult to find a good comparable firm ("Firm X")in a single line of business.
• C)It refers to the fact that there are a large number of firms in most industries, which results in an enormous amount of data collection when trying to determine an industry average
• P/E ratio.
• D)It refers to the fact that the expected eternal earnings growth rate ("X")is difficult to estimate.

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