Your stockbroker suggests you concentrate your portfolio on stocks with low P/E ratios.

She explains that these firms are likely to be out of favour with investors because they have a low price relative to their current earnings. Is this necessarily a good investment practice? Why or why not?

Word Count

200

Format

MLA

Answer Preview

According to Parrino, Kidwell and Bates (2012), a firm’s price-to-earnings ratio establishes how much investors are willing to pay for a dollar of its stock earnings.

Therefore, the ratio indicates the attractiveness of a stock relative…