CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

Tests of the relationship between price/earnings ratios and future stock returns suggest that ______
A. high P/E stocks paying a large dividend offer the greatest return potential.
B. high P/E stocks paying no dividend offer the greatest return potential.
C. low P/E stocks offer greater return potential than high P/E stocks.
Explanation: All of the tests show that low P/E stocks outperform high P/E stocks on average. This is referred to as the value effect. However, Fama and French found that when they applied the three-factor model instead of the CAPM, the value stock anomaly disappears.

User Contributed Comments 2

User Comment
teddajr This is a violation of semi-stron form EMH.
alexsar75 wouldn't everyone invest in low pe stocks and erase any excess returns then?
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