The P/E Effect

Posted by on Jan 9, 2013 in Academic, Economics, Investing, Statistics

According to the efficient market hypothesis no publicly available information can be used to produce excess returns consistently. However, a persistent pattern exists between current stock prices, earnings, and future returns, all of which are readily available to the public, which could be used to generate excess returns over the long run. An analysis of the S&P composite from 1871 to 2012 showed that a strong negative correlation exists between the 10 year average P/E ratio of the S&P composite (PE10) and the succeeding 20 year return of the the composite. Presumably, one could...

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