Finance: P/E Ratio The price of a share of stock divided by a company's estimated future earnings per share is called the P/E ratio. High P/E ratios usually indicate "growth" stocks, or maybe stocks that are simply overpriced. Low P/E ratios indicate "value'' stocks or bargain stocks. A random sample of 51 of the largest companies in the United States gave the following P/E ratios (Reference: Forbes).
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11
|
35
|
19
|
13
|
15
|
21
|
40
|
18
|
60
|
72
|
9
|
20
|
|
29
|
53
|
16
|
26
|
21
|
14
|
21
|
27
|
10
|
12
|
47
|
14
|
|
33
|
14
|
18
|
17
|
20
|
19
|
13
|
25
|
23
|
27
|
5
|
16
|
|
8
|
49
|
44
|
20
|
27
|
8
|
19
|
12
|
31
|
67
|
51
|
26
|
|
19
|
18
|
32
|
|
|
|
|
|
|
|
|
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(a) 
Use a calculator with mean and sample standard deviation keys to verify that x = 25.2 and s = 15.5.
(b) Find a 90% confidence interval for the P/E population mean m of all large
U.S. companies.
(c) Find a 99% confidence interval for the P/E population mean m of all large
U.S. companies.
(d) Interpretation Bank One (now merged with J.P. Morgan) had a P/E of 12, AT&T Wireless had a P/E of 72, and Disney had a P/E of 24. Examine the confidence intervals in parts (b) and (c). How would you describe these stocks at the time the sample was taken?
(e) Check Requirements In previous problems, we assumed the x distribution was normal or approximately normal. Do we need to make such an assump- tion in this problem? Why or why not? Hint: See the central limit theorem in Section 6.5.