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there is a statement like this: when a company has low price/earnings ratio, CAPM is unable to forecast accurately the returns?
Is it because a company that has low price/earnings ratio indicates this is a small company and investors in the market are less prepared to buy these shares, shares are not widely circulated in the market so using CAPM is unable to forecast risk of that business => cant forecast returns accurately.
Thank you so much Sir.
What you have written is correct.
However I don’t like the original statement as it is written – partly because we can never say that CAPM will accurately forecast the returns for any company, and also a low PE ration does not automatically always mean we can’t use CAPM.
It would be better if it had said “when a company has a low PE ration, CAPM is less likely to accurately forecast the returns” 🙂
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