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Hello sir. Tiny question.
How is the PE ratio and Equity Beta connected.
If Equity beta is equal to 2 – it means that this company is twice as risky as the market at the moment.
Does that mean that this company will have PE twice lower than similiar industry average/Market average Company?? (because the more risk the higher Investors require returns the lower the MV of shares must be, so The lower PE is …confused a bit with conclusions.:)
2) Secondly, if company is deemed to be very very profitable in future PE will be very high… I understand that. But what about the Beta? (Systematic risk) dont understand the linkage between high returns and risk.
3) Can there be very high returns with low risk anticipation??
Thee is no direct link.
The beta measures the risk. The PE ratio gives an indication of the expected future growth – higher PE suggests shareholders are expecting higher future growth – when comparing companies within a particular sector.
Higher betas and therefore higher risk means that shareholders will require a higher return (that is the basic CAPM formula).
No – higher risk automatically means that shareholders will demand higher returns; lower risk means they will accept lower returns. That is the whole basis behind CAPM.
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