A stock that has a high required rate of return because of its risky nature will usually have a high P/E ratio.
Per Formula 10-8, a higher K lowers stock price, resulting in a lower P/E ratio.

Question

Quizplus · Accepted Answer

According to Formula 10-8, a higher required rate of return (K) would result in a lower stock price and a higher P/E ratio. Therefore, the statement in the question is false.

A Stock That Has a High Required Rate of Return