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CAPM and PE ratio

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › CAPM and PE ratio

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • June 21, 2019 at 5:50 pm #521019
    anazoric
    Participant
    • Topics: 36
    • Replies: 59
    • ☆☆

    I have read this problem with applying CAPM and I would appreciate further explanation.

    “The CAPM is unable to forecast returns accurately for companies with low price earnings ratio”.

    Can you explain further the relationship between CAPM and the PE ratio?

    June 22, 2019 at 9:41 am #521048
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    There is no direct relationship between the two.

    However it is 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 less able to forecast the risk of that business and so cant forecast returns accurately.

    June 22, 2019 at 6:08 pm #521081
    anazoric
    Participant
    • Topics: 36
    • Replies: 59
    • ☆☆

    Thank you John.

    June 23, 2019 at 9:19 am #521105
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘CAPM and PE ratio’ is closed to new replies.

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