Mean Reversion

StatisticsInvestmentBehavioral Finance

Mean Reversion is the tendency for values to return to their historical average over time.

Introduction

Mean Reversion is the tendency for values to return to their historical average over time.

Core Concepts

  1. Deviation Analysis: Identify extremes in performance or behavior.
  2. Long-Term Trends: Expect outliers to normalize eventually.
  3. Timing and Patience: Understand that reversion occurs over varying timeframes.

Applications

  • Stock market analysis for identifying overvalued or undervalued assets.
  • Business performance evaluation to recognize temporary trends.

Related Resources

  • Tools: Regression analysis software.
  • Book: "A Random Walk Down Wall Street" by Burton Malkiel.

Related Topics

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