bs managing risk group1

8/2/2019 BS Managing Risk Group1

1/12

P/E Ratio Frequency

7 2

8 2

9 12

10 16

11 8

12 5

13 314 2

16 1

18 2

BANKING INDUSTRY


2/12

P/E Ratio Frequency Probablity Dist.

7 2 0.037037

8 2 0.037037

9 12 0.222222

10 16 0.296296

11 8 0.148148

12 5 0.092593

13 3 0.055556

14 2 0.037037

15 1 0.018519

16 1 0.018519

18 2 0.037037

54 1


3/12

P/E Ratio Frequency P/E Ratio Frequency

10 1 23 2

11 1 24 2

12 1 25 1

13 5 27 2

14 3 29 2

15 3 30 2

16 4 31 1

17 4 34 2

18 1 37 119 2 43 1

20 3

21 2

22 1

HEALTH CARE INDUSTRY


4/12

P/E ratio Frequency Probablity Dist.

10 1 0.021276596

11 1 0.021276596

12 1 0.021276596

13 5 0.106382979

14 3 0.063829787

15 3 0.063829787

16 4 0.085106383

17 4 0.085106383

18 1 0.021276596

19 2 0.042553191

20 3 0.063829787

21 2 0.042553191

22 1 0.021276596

23 2 0.042553191

24 2 0.042553191

25 1 0.021276596

27 2 0.042553191

29 2 0.042553191

30 2 0.04255319131 1 0.021276596

34 2 0.042553191

37 1 0.021276596

43 1 0.021276596

47 1


5/12

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

7 8 9 10 11 12 13 14 15

Probablit

y

P/E Ratio

Banking

Banking


6/12

0

0.02

0.04

0.06

0.08

0.1

0.12

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 27 29 30 31 34 37 43

Proba

blity

P/E Ratio

Health Care

Health Care

Highly Skewed Right


7/12

The price-to-earnings (P/E) ratio of a stock is a measure of the price paid fora share relative to the annual net income or profit earned by the firm pershare.

A higher P/E ratio means that investors are paying more for each unit of netincome, so the stock is more expensive compared to one with a lower P/Eratio.

What is P/E ratio?


8/12

P/ERange

Interpretation

N/A A company with no earnings has an undefined P/E ratio. Byconvention, companies with losses (negative earnings) are usuallytreated as having an undefined P/E ratio, even though a negativeP/E ratio can be mathematically determined.

0-10 Either the stock is undervalued or the company's earnings are

thought to be in decline. Alternatively, current earnings may besubstantially above historic trends or the company may haveprofited from selling assets.

10-17 For many companies a P/E ratio in this range may be considered fairvalue.

17-25 Either the stock is overvalued or the company's earnings haveincreased since the last earnings figure was published. The stockmay also be a growth stock with earnings expected to increasesubstantially in future.

25+ A company whose shares have a very high P/E may have highexpected future growth in earnings or the stock may be the subjectof a speculative bubble.

General Interpretations of Price to Earnings (P/E) Ratio


9/12

A risk-avoider would find the banking industry more attractive as theaverage P/E ratio for this industry is 11 and a P/E ratio in the range of10-12 suggests that the stock will return a fair value for the industry.

A risk-seeker would probably invest in the health care industry as theaverage P/E ratio for this industry is 22 and a P/E in the range of 17-25would mean that the stock is overvalued or the companys earningshave increased since the last earnings figure was published.

General Interpretations of Price to Earnings (P/E) Ratio


10/12

Industry-wise interpretation of P/E ratio

Note:

Ideal P/E ratio for Banking industry taken as 10-12

Ideal P/E ratio for Health Care industry taken as 17-25


11/12

The ideal P/E ratio for banking industry is 10-12.From the given companies 55.55% companies lie within the ideal range.16.66% companies have a P/E ratio more than 12.Speculated stock ratio is less.Therefore, a risk-avoider will prefer to invest in the banking industry.

Risk-Avoider

The ideal P/E ratio for health care industry is 17-25.From the given companies 38.29% companies lie within the ideal range.

23.40% companies have a P/E ratio more than 12.Speculated stock ratio is more than the banking industry.Therefore, a risk-seeker will prefer to invest in the health care industry.

Risk-Seeker


12/12

The expected payoff for an investment measures what you can expect aninvestment to earn based on the different possible outcomes of theinvestment.

You can determine the expected payoff based on the probabilities of each

possible outcome.

The possible outcomes are also weighted based on their value: outcomeswith larger returns increase the expected payoff, while outcomes with smallreturns or that result in losses, lower the expected payoff.

Expected Payoff

bs managing risk group1

Documents