Stock prices and stand-alone risk The S&P 500 Index is one of the most commonly used benchmark indices for the U.S. equity markets. Consisting of 500 companies, it is a market value-weighted index. This means that each company's performance is reflected in the index, weighted by the ratio of the company's value to the total value of all the companies.
1. Based on your understanding of P/E ratios, in which of the following situations would the average trailing P/E ratio (current price divided by earnings per share over the previous 12 months) of the S&P 500 Index be higher?
The outlook for the economy and the markets is for a downturn.
The outlook for the economy and the markets is for an improvement.
2. You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). What kind of risk will you primarily be exposed to?
Stand-alone risk
Portfolio risk
3. Generally, investors would prefer to invest in assets that have:
A low level of risk and high expected returns
A high level of risk and low expected returns