increased.InFigure8.15,wereportontheprice-to-bookratio
fortheS&P 500 ononeaxisandthereturnonequityforS&P
500 firmsontheother.Theincreaseintheprice-to-bookratio
overthepasttwodecadescanbeatleastpartiallyexplained
by the increase in return on equity over the same period.
FIGURE 8.15Price-to-Book Ratios and ROE: S&P 500
Comparing Equity Multiples across Countries
Comparisonsareoftenmadebetweenprice-earningsratiosin
differentcountrieswiththeintentionoffindingundervalued
andovervalued markets.Markets withlower P/Eratiosare
viewedasundervaluedandthosewithhigherP/E ratiosare
considered overvalued. Given the wide differences on
fundamentals that exist between countries, it is clearly
misleading to draw these conclusions. For instance, you
would expect to see the following,other things remaining
equal: