Mean Reversion

Mean Reversion is a theory that suggests prices and returns eventually move back towards the mean or average. 

Mean Reversion

Mean Reversion is a theory that suggests prices and returns eventually move back towards the mean or average. 

 


Application of Mean Reversion

This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.

This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performance has differed from their historical averages. While this strategy may be profitable in some cases, a change in returns could be a warning that the security has undergone changes in fundamental conditions, in which case there is no guarantee that mean reversion will occur. 



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