One basic investing tenet is that prices appreciate to reflect the earnings power of a
stock. Fast growing stocks should therefore outperform slow growing stocks. Suppose
we classify stocks into 2 categories today: high growth stocks and low growth stocks.
We can then form two groups of stocks that have the same beta - a group of high
growth stocks and a group of low growth stocks. In an efficient market, the group of
high growth stocks is expected to provide a higher expected return than the group
of low growth stocks.
Question1 Clearly state whether the above statement (in italics) is 'true' or 'false'.
It is a very tricky question.
The statement is false. The discounting rate for a high growth stock is higher than the low growth stock and given the same ...