Many stock market observers say that when the P/E ratio for stocks gets over 20 the market is overvalued. The P/E ratio is the stock price divided by the most recent 12 months of earnings.
Suppose you are interested in seeing whether the current market is overvalued and would also like to know what proportion of companies pay dividends. A random sample of 30 companies listed on the New York Stock Exchange (NYSE) is provided (Barron's, January 19, 2004).
a. What is a point estimate of the P/E ratio for the population of stocks listed on the New York Stock Exchange? Develop a 95% confidence interval.
b. Based on your answer to part (a), do you believe that the market is overvalued?
c. What is a point estimate of the proportion of companies on the NYSE that pay dividends? Is the sample size large enough to justify using the normal distribution to construct a confidence interval for this proportion? Why or why not?

  • CreatedSeptember 20, 2015
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