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Suppose that you wanted to test the efficiency of the market in establishing Price Earnings ratios for firms. In other words, you want to examine

Suppose that you wanted to test the efficiency of the market in establishing Price Earnings ratios for firms. In other words, you want to examine whether Low PE stocks perform differently than high PE stocks on a risk adjusted basis over time. Provide a step by step methodology that you could follow to examine this issue. Specifically, adapt the methodology described for assessing whether the market prices firms of different size efficiently as explained in the lecture notes (Size Effect) to examining the PE effect.

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