Portfolio Evaluation of Common Stocks 1N Relation to P-E Ratio

Abstract

Portfolio evaluation is carried out to assess the risk & return of the different portfolios. An investor should put portfolio performance in context relative to investment goals, risk tolerance, and the investment climate for the assets invested. This is a guideline on how investors can measure their investment successes. investors and stock analysts have long used price-earnings ratios, usually called PIE ratios, to help determine if individual stocks are reasonably priced. More recently, some economists have argued that the average price-earnings ratio for a stock market index such as the S&P 500 can help predict long-term changes in that index. According to this view, a low PIE ratio tends to be followed by rapid growth in stock prices in the subsequent decade and a high PIE ratio by slow growth in stock prices. The purpose of this paper is to determine empirically whether the investment of common stocks is related to their PIE ratio. This study explains how the PIE ratio is measured and shows that it is currently high relative to its historical average. The study found that investor could not rely on PIE ratio, while selecting a portfolio.