CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

The theory suggesting that prices and returns eventually move back towards the average is called:

A. Auto-regression.
B. Covariance stationary.
C. Mean reversion.
D. Zero error autocorrelation.
Correct Answer: C

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. Looking at a time series over a few weeks - or even a few years - may be misleading. Mean reversion may only reveal itself over very long horizons.

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