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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Suresh, aged 35, has a high risk appetite and a 20-year horizon. His adviser considers a growth-oriented stock with a low dividend yield and high P/E. Which statement about such a stock is most accurate?

For a growth stock with a low dividend yield and high P/E, most of the expected return is likely to come from capital appreciation. The company reinvests earnings, so dividends are small, though the stock still carries market risk.

  1. AMost of its expected return is likely to come from capital appreciation rather than dividendsCorrect
  2. BMost of its expected return will come from dividends
  3. CIt carries no market risk because of high earnings growth
  4. DIts P/E will necessarily fall each year

Explanation

Growth stocks retain earnings to reinvest, paying low dividends and offering returns mainly through price appreciation. They remain exposed to market risk, and the P/E need not fall each year.

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