Which of the following best defines mean reversion?
A)Returns for securities tend to move toward higher performance when returns are examined over shorter time frames
B)Returns for securities tend to move toward lower performance when returns are examined over shorter time frames
C)Returns for securities tend to move toward average performance when returns are examined over longer time frames
D)All of the above
E)None of the above

Question

Quizplus · Accepted Answer

Mean reversion is the tendency of a financial instrument or asset to move back to its average or long-term mean after experiencing a deviation. In the context of investing, mean reversion suggests that securities that have performed above or below their average in the short term will likely revert to their mean over a longer period. Therefore, option C best defines mean reversion.

Which of the Following Best Defines Mean Reversion