The "overreaction hypothesis" as formulated by DeBondt and Thaler states that people overreact to unexpected and dramatic news events. As a result,
A) "winner" and "loser" portfolios show no difference in performance over a three-year period.
B) "winner" portfolios generally outperform the market over a three-year period.
C) "loser" portfolios generally continue losing.
D) "loser" portfolios tend to outperform the market over a three-year period.

Question

Quizplus · Accepted Answer

The "overreaction hypothesis" suggests that stocks that have performed poorly in the past (losers) will tend to outperform the market in the future, as the market corrects for the initial overreaction to bad news.

The "Overreaction Hypothesis" as Formulated by DeBondt and Thaler States