Topic_9_E2 - Topic 9 Exercise 2 Risk and Return Stock...

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Topic 9 Exercise 2 Risk and Return Stock Valuations The Standard & Poor’s 500 Index closed at an all time high of 1527 on March 24, 2000. On May 14, 2002, the S&P 500 closed at 1097, which was about the same level as it was in 1998. The decline in a little over two years was about 28%. At the same time, earnings have fallen by 50% from 2000 to 2001 and are at their lowest level since 1993. The decline in earnings has led to Price Earnings Ratios (P/Es) at very high levels, reaching three times their historical average. This has led many in the financial community to predict that the market may be overvalued and that long run rates of return may be substantially lower than they were in the 1990s. In “Searching for Value in the U.S. Stock Market,” Kevin Lansing discusses the levels of market value in May of 2002 and what these high levels of P/Es may mean for future returns. After reading this article, answer the following questions: 1. Describe the three possible explanations the author cites as being candidates for
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Topic_9_E2 - Topic 9 Exercise 2 Risk and Return Stock...

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