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In interpreting the standardized unexpected earnings (SUE) momentum measure, it can be concluded that a given size forecast error is:

A) scaled by the earnings surprise.

B) more meaningful the smaller the historical size of forecast errors.

C) more meaningful the larger the historical size of forecast errors.

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A given size forecast error is more (less) meaningful the smaller (larger) the historical size of forecast errors.

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Robert Chan comments to Leslie Singer that Converted Industries’ expected dividend growth rate is 5.0%, dividend payout ratio (g) is 45%, and required return on equity (r) is 10%. Based on a justified trailing P/E ratio compared to the stock's trailing P/E ratio at market of 9.0, Converted Industries is most likely:

A) overvalued.

B) correctly valued.

C) undervalued.

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Justified trailing P/E = payout ratio * (1 + g) / (r − g). When the expected dividend growth is 5.0%, the justified trailing P/E = 0.45 * (1 + 0.05) / (0.10 − 0.05) = 9.45. This is greater than the market P/E of 9.0.

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At a CFA society function, Robert Chan comments to Li Chiao that Xanedu Industries’ expected dividend growth rate is 5.5%, dividend payout ratio (g) is 40%, and required return on equity (r) is 12%. Based on a justified leading P/E ratio compared to a market P/E ratio of 8.0, Xanedu Industries is most likely:

A) undervalued.

B) overvalued.

C) correctly valued.

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Justified Leading P/E = payout ratio / (r − g). When the expected dividend growth is 5.5%, the justified leading P/E = 0.40 / (0.12 − 0.055) = 6.15. This is less than the market P/E of 8.0.

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Leslie Singer comments to Robert Chan that Dreamtime Industries’ expected dividend growth rate is 5.0%, ROE is 14%, and required return on equity (r) is 10%. Based on a justified P/B ratio compared to a P/B ratio (based on market price per share) of 1.60, Dreamtime Industries is most likely:

A) overvalued.

B) undervalued.

C) correctly valued.

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Justified P/B = (ROE − g) / (r − g). When the expected dividend growth is 5.0%, the justified P/B = (0.14 − 0.05) / (0.10 − 0.05) = 1.80. This is greater than the market P/B of 1.60.

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Herb McClain tells Cammy Oren that Kline Industries’ expected dividend growth rate is 4.0%, ROE is 14%, and required return on equity (r) is 10%. Based on a justified P/B ratio compared to a P/B ratio (based on market price per share) of 1.55, Kline Industries is most likely:

A) undervalued.

B) overvalued.

C) correctly valued.

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Justified P/B = (ROE − g) / (r − g). When the expected dividend growth is 4.0%, the justified P/B = (0.14 − 0.04) / (0.10 − 0.04) = 1.67. This is greater than the P/B (at market) of 1.55.

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An analyst is preparing a presentation on “Interpreting PE ratios” and has the following data:

	Portfolio %	Stock PE
Stock AAA	60%	10
Stock BBB	40%	15

Which of the following is the most appropriate measure for calculating the portfolio P/E?

A) Geometric mean of the P/E’s.

B) Arithmetic average of the P/E’s.

C) Weighted harmonic mean of the P/E’s.

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The weighted harmonic mean of the 10 and 15 will give the result closest to the portfolio earnings divided by the portfolio value.

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An analyst is calculating the weighted harmonic mean P/E ratio of a 2-stock portfolio. Stocks AAA and BBB have prices of $12 and $15, respectively, and EPS of $1 and $2, respectively. Which of the following is the weighted harmonic mean P/E of the portfolio closest to?

A) 9.00

B) 9.23

C) 9.75

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The weighted harmonic mean is 1/[(12/27)(1/12) + (15/27)(2/15)] = 27/3 = 9.00 The weighted harmonic mean of the individual stocks P/Es is the best measure of the P/E for a portfolio of stocks.

luckygiftvn

An analyst is preparing a presentation on “Interpreting PE ratios” and has the following data:

	Portfolio %	Stock PE
Stock AAA	60%	10
Stock BBB	40%	15

Which of the following is closest to the weighted harmonic mean of these two PE ratios?

A) 12.49.

B) 11.98.

C) 11.54.

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The weighted harmonic mean of the two PE ratios is a harmonic mean which is weighted by the portfolio weights.
1/[(0.60 × 1/10) + (0.40 × 1/15)] = 11.54