You have two flatmates who invest in the stock market.

a. One flatmate says she buys stock only in companies that everyone believes will experience big increases in profits in the future. How do you suppose the price–

earnings ratio of these companies compares to the price–earnings ratio of other companies? What might be the disadvantage of buying stock in these companies?

b. Another flatmate says she only buys stock in companies that are cheap, which she measures by a low price–

earnings ratio. How do you suppose the earnings prospects of these companies compare to those of other companies? What might be the disadvantage of buying stock in these companies?