How earnings growth explains growth in stock price

Reference no: EM131169081

Stock prices and earnings. In the long run, the price of a company's stock ought to parallel changes in the company's earnings. Table 2.8 gives data on the annual growth rates in earnings and in stock prices (both in percent) for major industry groups as set by Standard & Poor's.55

(a) Make a graph showing how earnings growth explains growth in stock price. Does it appear to be true that (on the average in the long run) stock price growth parallels earnings growth?

(b) What percent of the variation in stock price growth among industry groups can be explained by the linear relationship with earnings growth?

Reference no: EM131169081

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