In an efficient capital market, the market price of a stock incorporates all the relevant information affecting the performance of the company, thereby indicating that no particular investment strategy can generate superior returns over a period of time. The price ratio hypothesis states that investments in low `PriceEarning' stocks have an upside potential, as the earnings have not been discounted into price. The low PriceEarning ratio of certain companies, which are fundamentally sound, is on account of the markets neglecting them. The validity of efficient market hypothesis, which believes that neither a high PriceEarning nor a low PriceEarning is indicative of future performance on a riskadjusted basis, is directly questioned by the price ratio hypothesis. This study aims to test the proposition that stocks with a lower PriceEarning, as compared to the industry average, provide higher returns than higher PriceEarning stocks. This study examines the investment results of 76 shares of the current BSE 100 index over the last six years, viz., 1999 to 2005. Every year, a new portfolio was formed, based on a comparison of the company PriceEarning with that of the industry. The portfolio selection was also subject to different band filters. The performance of all such portfolios were studied on a year basis, as well as on cumulative basis; and were compared with the BSE 100 performance. The findings of the study substantiate the price ratio hypothesis by the low PriceEarning portfolios compared to the industry outperforming the market portfolio. The results suggest that an additional return can be achieved by adhering to the strategy of investing in scrips having low PriceEarning ratio as against the industry average, and also that, to a certain degree, having a bandwidth for taking investment decision may lead to a superior performance, which may be appealing to fund managers.

Indian capital market is strengthening and there are many macroeconomic factors leading to it, e.g., increased FII investments, increase in the FDI limits, liberalization and privatization, India being considered as a contender for being a manufacturing base, etc. Given the above scenario and the ongoing bullrun investors have tried to look at various parameters to identify stocks which would outbeat the market. One of the most widely used parameters that has gained the attention of the s is the PriceEarnings ratio.

An Empirical Investigation of P/E-based Stock Selection Strategy in the Indian Equity Market, capital market, market price, investment decision, macroeconomic factors, liberalization and privatization, PriceEarnings ratio, fund managers.