Final answer:
A company with a growth rate twice that of the market is expected to have a PE ratio higher than the market due to investors valuing higher future earnings potential. Higher growth can influence stock price appreciation, leading to higher PE ratios over time if the company maintains its growth.
Step-by-step explanation:
The stock of a company with a growth rate twice the market is expected to have a PE ratio higher than the market. This expectation is based on the general principle that investments with higher growth rates tend to command higher price-to-earnings ratios, as investors are willing to pay more for higher future earnings potential. Stocks represent ownership in a company and reflect both current performance and future prospects. High-growth companies are often valued more highly because their future earnings are expected to increase at a faster rate than those of the market as a whole, leading to higher PE ratios.
It's important to note that while higher growth can lead to higher PE ratios, this does not necessarily mean the stock will always perform better. Stock values are subject to various factors including market sentiment, interest rates, and company-specific news. Over time, however, a high-growth company is more likely to see significant appreciation in its stock price compared to the broader market if it can maintain its growth trajectory. Therefore, the hypothesis about higher PE ratios aligns with the tendency for investors to value growth potential.