1. Empirically, we find that stocks with low P/E ratios on average have a higher risk adjusted returns than stocks with high P/E ratios. This is known as the P/E anomaly. We think the P/E anomaly is because investors tend to:

overestimate the discount rate of high P/E stocks

underestimate the growth rate of high P/E stocks.

overestimate the growth rate of high P/E stocks.

underestimate the discount rate of high P/E stocks.

2. What information do investors combine to estimate a stock’s price?

Cash-flows and Discount Rates

Cash-flows and earnings

Cash-Flows and P/E ratios

Discount Rates and earnings