1. Empirically, we find that stocks with low P/E ratios on average have a higher risk adjusted returns than stocks with high P/E ratios. This is known as the P/E anomaly. We think the P/E anomaly is because investors tend to:
overestimate the discount rate of high P/E stocks
underestimate the growth rate of high P/E stocks.
overestimate the growth rate of high P/E stocks.
underestimate the discount rate of high P/E stocks.
2. What information do investors combine to estimate a stock’s price?
Cash-flows and Discount Rates
Cash-flows and earnings
Cash-Flows and P/E ratios
Discount Rates and earnings