The Performance of SPI Stocks in Relation to Their P/E Ratios
GRADUATE Gian-Luca Thalmann SUPERVISOR Dr. Thomas Gramespacher
According to the efficient market hypothesis (EMH), stock
rates of return (considering total and systematic risk) than
markets are price-efficient, meaning that in an efficient cap
the high P/E portfolios. Furthermore, low P/E portfolios
ital market, security prices fully reflect available information,
were able to generate significant excess returns compared
and no investor can make an abnormal profit from it. While
to the market. While the the pre-financial crisis section does
there is substantial empirical evidence supporting the EMH,
not fully confirm the P/E ratio hypothesis, the post-financial
many still question its validity. Proponents of the price-earn
crisis section underlines the higher absolute and risk-
ings (P/E) ratio hypothesis claim that low P/E stocks tend to
adjusted returns of the low P/E portfolios.
outperform high P/E stocks and that their returns tend to be larger than warranted by their underlying risks.
In conclusion, the “P/E effect” seems to exist for stocks within the Swiss Performance Index during the period
The aim of this bachelor’s thesis was to determine whether
2005 – 2015, and the P/E ratio hypothesis may, therefore,
low P/E ratio stocks outperform high P/E ratio stocks in the
be considered as validated. The findings also suggest that
Swiss stock market by considering the period 2005 – 2015.
P/E ratio information is not “fully reflected” in security prices
It presents evidence that low P/E portfolios can generate
as postulated by the EMH. Further research could apply
excess returns compared to the market, and it investigates
other risk-based models to verify if the derivations from the
the extent to which an abnormal return can be generated
CAPM are due to mispriced securities or simply a result of
by investing in the portfolio with the lowest P/E ratio (in
a failed risk adjustment procedure of the CAPM.
terms of the CAPM). For each year of the period under consideration, four port folios were formed consisting of 25 stocks with similar P/E ratios. Each of these portfolios represents a mutual fund following a strategy of purchasing securities in the given P/E quartile on January 1, holding the portfolio for one year, and then liquidating and reinvesting the proceeds in the same quartile portfolio the following year. The research con sisted of two parts: comparing the returns on an absolute performance basis and adjusting them to their correspond ing risks. Subsequently, the results were split into a preand a post-financial crisis section. During the 11-year period under investigation, the low P/E portfolios earned higher average absolute and risk-adjusted
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BSc Banking and Finance
Bachelorarbeit – Banking and Finance