Topic 9 Exercise 1 Risk and Return Historical Prices on Stocks The last half of the 1990s witnessed a phenomenal growth in stock prices and average returns on stocks that were twice or more than their long run average. Since 2000, the stock markets indexes have dropped considerably. The question that remains unanswered is whether or not the stock market is correctly valued. Much of the discussion in the financial press has focused on the fact that P/E ratios are still above their long-term averages, leading many to conclude that the stock market may still be overvalued. In “A Retrospective on the Stock Market in 2000,” the authors examine the behavior of P/E ratios and explanations driving the historically high P/E ratios. After reading this article, address the following questions: 1. What is a P/E Ratio? The P/E ratio is the price of the stock divided by the most recent annual earnings per share. It describes the multiple of current earnings that an investor had to pay for the stock. A P/E of 12 would mean that the price of the stock is 12 years of current earnings
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Earnings growth, high levels, P/E ratios, recent annual earnings