A. One roommate says that he buys stock only in companies that everyone believes

Question

A. One roommate says that he buys stock only in companies that everyone believes will experience big increases in profits in the future. How do you suppose the price-earnings ratio of these companies compares to the price-earnings ratio of other companies? What might be the disadvantage of buying stock in these companies?

B. Another roommates says he only buys stock in companies that are cheap, which he measures by a low price-earnings ratio. How di you suppose the earnings prospects of these companies compare to those of other companies? What might be the disadvantage of buying stock in these companies?

Explanation / Answer

a) price earning ratio of these companies will be higher compared to other companies. as these companies are expected to get more profits in future so demand for stock in these companies will be high .so price for one amount of dollar earned will be high. disadvantage of buying stock in these companies is as this company is already developed .so there will be less increase in value of stock compared to other companies b)price earning ratio of these companies will be lower compared to other companies. as these companies are expected to get more profits in future so demand for stock in these companies will be low .so price for one amount of dollar earned will be low. disadvantage of buying stock in these companies is as this company is that company may get huge loses as it is not developed so stock value decreases

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.