The Price-Earnings Effect Refers to the Observation That

question 39

Multiple Choice

The price-earnings effect refers to the observation that:

• A)risk-adjusted returns are unrelated to price-earnings ratios.
• B)risk-adjusted returns are lower,the smaller the price-earnings ratio.
• C)risk-adjusted returns are lower,the larger the price-earnings ratio.
• D)risk-adjusted returns are higher,the smaller the price-earnings ratio.

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Definitions:

Declining-Balance Method

A method of accelerated depreciation where an asset loses value at a faster rate in its early years of use.

Revenue Expenditures

Expenditures that are immediately charged against revenues as an expense.

Ordinary Repairs

Expenditures to maintain the operating efficiency and productive life of the unit.

Capital Expenditures

Capital employed by a business to buy or enhance tangible assets like land, factories, or machinery to boost long-term business activities.