Empirical Research On The Relationship Between Price-Earning Ratio And Earning Ratio Risk

As finance play a more important role in economy development, financial risk became a hot topic for recent years. After more than ten years'high-speed advancement , stock market in China has already taken shape, exerting influence on the allocation of resource gradually. However, in the operation of the security market, the deviation of the stock price from capital's real value occurs at high frequency and evens leads to serious price manipulation, which lowers the market's price-discovery ability. Reasons are that on the one hand, when using Price-Earning Ratio to estimate the investment value of security, the result shows that some stocks has the extra high Price-Earning Ratio and the exceptional phenomenon make investor have doubts on the affection of Price-Earning Ratio.As the Price-Earning Ratio accepted by investor for its direct-viewing and combination of the security market and the operation status. On the other hand, Price-Earning Ratio is supposed to be one indicator of investment risk for the exceptional phenomenon. In this paper, we construct two investment Portfolios: Portfolios A and Portfolios B. Portfolio A is composed of sixteen stocks, which are on-average Price-Earning Ratio from sixteen different industries, and Portfolio B is also composed of sixteen stocks, which are on-high Price-Earning Ratio from the corresponding industries of the Portfolio A. Based on the lower partial model , the experimental research on the relationship between Price-Earning Ratio and Lower partial risk show that at the same Earning Ratio, Portfolio A has less Lower partial risk than Portfolio B.Since the result of the experimental research indicate that price manipulation and behavior of speculation lowers the market's price-discovery ability. In sense, this research give a guiding in theory and practice of invest risk research in the security market in China.At last, to make a better use of Price-Earning Ratio in evaluating the investment value of stocks, some suggestions have been proposed under the special condition of stock market in China.