If you believe in the reversal effect, you should
A) sell bonds in this period if you held stocks in the last period.
B) sell stocks in this period if you held bonds in the last period.
C) sell stocks this period that performed well last period.
D) go long.
E) sell stocks this period that performed well last period and go long.

Question

Quizplus · Accepted Answer

EThe reversal effect suggests that assets that performed well in one period are likely to underperform in the subsequent period. Therefore, selling stocks that performed well last period (C) aligns with this belief. Additionally, going long (investing with the expectation that the stock will rise) does not contradict the reversal effect, especially if one is going long on stocks that did not perform well in the previous period, expecting a reversal. Thus, option E, which combines selling high-performing stocks from the last period and going long, also aligns with the reversal effect strategy.

If You Believe in the Reversal Effect, You Should