Question

Compared to growth stocks, value stocks' price-earnings ratio is typically:

• There is no relationship between the price-earnings ratios of growth and value stocks.

• The same.

• Higher.

• Lower.

Answer 1

Compared to growth stocks, value stocks' price-earnings ratio(now referred as PE ratio) is typically lower, because.

generally it has been seen that value stock's are those stocks which investor thinks has more value in comparison with Price in stock market,(because stock price of value stock in market is low) that's why there is a lower PE Ratio, because the numerator i.e. price is low when compared with growth stock.

Growth Stocks are those stocks that have a huge potential of growth and they normally don't pay dividends, instead invest the money in the business itself.but its value in the market increases because of the profit generating capability and growth potential. Therefore, it will lead to higher market price, leading to higher PE Ratio.

Hence, Compared to growth stocks, value stocks' price-earnings ratio is typically lower.

Option 1 is incorrect, because as stated, both value and growth stocks have relationship between Price earning ratio.

Option 2 is incorrect because PE Ratio for value stock and growth stock acts in a different manner,

Option 3 is incorrect because PE Ratio of Value stock have lower PE Ratio as compared to growth stock