Econometrics and Forecasting for Business (ECO 627 PA)

Case Study # 1: Large Companies P/E Ratios

Due on 9/5/2020

Fatma Abdel-Raouf Fall I, 2020

Use Excel to Answer the Following Questions and Show All Your Work:

The price of a share of stock divided by the company’s estimated future earnings per share is called the
P/E ratio. High P/E ratios usually indicate “growth” stocks or maybe stocks that are simply overpriced.
Low P/E ratios indicate “value” stocks or bargain stocks. A random sample of 51 of the largest
companies in the U.S. gave the following P/E ratios in 2009 (Reference: Forbes):

11 35 19 13 15 21 40 18 60 72
9 20 29 53 16 26 21 14 21 27
10 12 47 14 33 14 18 17 20 19
13 25 23 27 5 16 8 49 44 20
27 8 19 12 31 67 51 26 19 18
32

a. Get the descriptive statistics for the data and verify that 𝑋̅ = 25.2 and s = 15.5.
b. Check the sample size condition.
c. Find a 99% confidence interval for the P/E population mean (μ) for all large U.S. companies.
d. In June 2009, Bank of America had a P/E ratio of 14, Apple had a P/E ratio of 25, and Sears
Holdings Inc. had a P/E ratio of 64. Examine the confidence interval in part c, and explain how
you would describe these stocks at this time.
e. Calculate the Pearson coefficient of skewness and comment on the normality of the data.
f. Graph the histogram and check for the normality of the data.

Econometrics – CS #1
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Helpful Hints:
1. Add the ToolPak, click on File, choose Options, click on Add-Ins, choose Analysis ToolPak,
ToolPak VBA and Solver, then click on Go.
2. Transfer the data from row to columns using “TRANSPOSE” fn on Excel: Copy the row you want
to transfer, then select “Paste special” click on “transpose.” Repeat for each row.
3. You can get the mean, median, S.D., Skewness (K3), Kurtosis (K4), confidence interval and more
using the descriptive statistics fn. Click on Data, select Data Analysis, Descriptive Statistics.
Sample size condition: n>10 𝐾32 and n > 10 |𝐾4 |
3 (Mean−Median)
Pearson Coefficient of Skewness = S.D.
4. Graph the histogram to check for normality. Put your Bin in a column (you can name it with the
variable name), these will be your classes or ranges. Click on Data, select Data Analysis,
Histogram. Make sure you check the “Chart Output” box.

Econometrics – CS #1
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