In a seminar, you are reviewing one of your classmates’ responses to the following question:
“Typically, which do investors prefer when trying to identify potential investments: higher or lower price/earnings and dividend yield ratios?”
Your classmate responded as follows:
“When trying to identify potential investments, investors prefer high price/earnings and dividend yield ratios. If these ratios are high, then investors know that the company’s shares are reasonably priced relative to the company’s earnings and that a high percentage of those earnings are being paid out annually as dividends.”

Required

Explain whether your classmate’s response is correct and, if not, explain how the ratios should be interpreted.