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    Investing in low P/E Stocks

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    Your stock broker suggests you concentrate your portfolio on stocks with low P/E ratios. She explains that these firms are likely to be out of favor with investors, because they have a low price relative to their current earnings. Is this necessarily a good investment practice? Why or why not?

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    Solution Preview

    P/E ratios are a useful indicator and tool when performing valuation and comparing firms.

    Price Earning ratios = Market price of equity per share/Earnings per share.

    The relationship between the market price of a share of stock and the stock's current earnings per share is often stated in terms of a price-earnings ratio. The price-earnings ratio is widely used by investors as a general ...

    Solution Summary

    The solution examines whether stock brokers should invest in low P/E stocks. P/E stock ratios are determined.