Melanie has observed that stocks that have earned high returns over the past year tend to earn low returns over the next year.She has also observed that stocks that earned low returns over the past year tended to earn high returns over the next year.This is an example of:

Question

Quizplus · Accepted Answer

This is an example of mean reversion in stock prices, as the high returns in one year tend to balance out with low returns in the following year and vice versa. The January effect refers to the tendency for stocks to perform particularly well in January, and stock price momentum refers to the idea that stocks that have been performing well will continue to do so. The size effect relates to the relationship between stock returns and the size of the company, which is not described in this scenario.

Melanie Has Observed That Stocks That Have Earned High Returns