Price / Earnings

Effect
Capital Asset
The Capital Asset Pricing Model (CAPM) is an
Pricing 1 equilibrium asset pricing model which states that the
expected return on a particular security is a positive
Model linear function of a security's sensitivity to changes in
its market portofolio returns
( CAPM )

In CAPM, risk and return is related positively and

2 linearly. It means, if the greater the risk of the
investment, investors will expected a higher rate of
return
 Price/Earning (P/E) Effect is a situation
1 where a portfolio with a lower average price /
income ratio has a higher return (when adjusted
for risk) than a portfolio with a higher ratio

Or it can be mentioned, that the P/E effect is a

2 distortion of market prices, where stocks with low
P/E tend to outperform the market

Price /
Earnings ( P / E ) 3
This trait is often referred to as "stock value" and
often also proves to be a good buying
Effect opportunity
 There are several possible origins of a typical signal
for this low ratio, including:

Stocks that are not currently in demand by the

1 market, because investors' attention and fashion
are elsewhere

Stock suffers from previous excess pessimism

2 about their prospects (negative overreaction)

Price / Business that have the potential to recover (under

3
Earning ( P / E ) reaction)

Effect
Thank
You