The Investment Performance of Common Stocks in Relation to Their Price-Earnings and Price-Earnings-Growth Ratios

Abstract

In this paper, the relationship between the investment performances of equity securities and their price-earnings (P/e) and price-earnings to growth rate (PBG) ratios are examined using a backtesting approach similar to the one employed by Basu in a 1977 paper and Johnson, Fiore, and Zuber in a 1989 paper. From the tests on Pie portfolios, we conclude that, for the period, there were some moderate excess rates of return earned by selecting stocks based on their price-earnings ratios, but that this excess ratio were not obtained from investing in the popular low price-earnings stocks. From the PBG analysis we found that there were some moderate abnormal rates of return csmed by selecting stocks based on their PBG ratios. (014)