Mean reversion refers to the observation that
A) stock prices overact to news announcements.
B) stocks prices are more volatile than fluctuations in their fundamental value would predict.
C) stocks with low returns are likely to have high returns in the future.
D) stocks with low returns are likely to have even lower returns in the future.

Question

Quizplus · Accepted Answer

Mean reversion argues that stocks that have performed poorly in the past are likely to have higher returns in the future. This is based on the idea that the stock's price will eventually return to its mean or average value. This does not suggest that stock prices overact to news announcements (A) or that they are more volatile than their fundamental value (B). It also does not suggest that stocks with low returns will have even lower returns in the future (D).

Mean Reversion Refers to the Observation That