Question

6. Answer the following review questions about the actual market efficiency. a. What is mean reversion? How might an investor use mean reversion to earn above-average returns? (10 points) b. What is excess volatility? How might an investor use excess volatility to earn above-average returns? (10 points)

Answer 1

In finance, mean reversion is the assumption that a stock's price will tend to move the average price over time. some asset classes, sut. as exchange eates are observed to be mean reverting. - By bying stocks when they are below their fundamental values. By a selling stocks when they are above their fundamental valus. 6 shiller (1980 defines excess volatility as a volatility of equity market that cannot be justified by varications in subsequent dividends. - By bying stocks when they below their fundamental values -By selling stocks when they aree above their fundamental values.