Testing the Efficiency of Price-Earnings Ratio in Constructing Portfolio

Ruzbeh J Bodhanwala

The IUP Journal of Applied Finance, 2014, vol. 20, issue 3, 111-118

Abstract: Price-Earnings (PE) ratio is a very powerful indicator in accessing share performance against its competitors or industry players. This study focuses on constructing portfolios on the basis of PE ratio and measuring its performance against the benchmark BSE sensex for the last 10 years (2002-2012). BSE index is above 24000+ points and picking stocks at this level is a risky business. Most of the investors and fund managers believe in picking stocks which are relatively cheaper than the industry average and therefore PE ratio would play an important role. Using a combination of statistical tools, it is proved that portfolios formed on the basis of low PE outperform the BSE Benchmark market returns.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjaf:v:20:y:2014:i:3:p:111-118

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