Question

An online investment blogger advises investing in mutual funds that have performed badly the past year because "regression to the mean tells us that they will do well next year." Is he correct.

Choose the correct answer below.
a. No, he is incorrect. Although the performance of funds will cluster around the mean on average, he cannot predict how any particular fund will do.
b. No, he is incorrect. The mutual fund will regress to the mean, but it may not do so for a few years.
c. Yes, he is correct.
d. No, he is correct. The mutual fund will regress to the mean, but this does not mean it will have a positive return.

Answer 1

The blogger is incorrect in advising to invest in mutual funds that performed badly in the past, as it cannot be predicted how any particular fund will perform. Regression to the mean does not guarantee future success. Investing in such funds is still a risky decision.

Step-by-step explanation:

The correct answer is a. No, he is incorrect. Although the performance of funds will cluster around the mean on average, he cannot predict how any particular fund will do. While regression to the mean suggests that funds that performed poorly in the past will improve, there is no guarantee that they will perform well next year. Investing in mutual funds that have performed badly in the past is still a risky decision.

Answer 2

No, he is incorrect. In this case, Although the performance of funds will cluster around the mean on average, he cannot predict how any particular fund will do.

The answer is option ⇒A

Step-by-step explanation:

The concept of regression to the mean states that extreme values are likely to move closer to the average over time. However, this does not guarantee that a mutual fund that performed poorly in the past year will necessarily do well the next year. There are several factors that can influence the performance of a mutual fund, including market conditions, management decisions, and economic factors.

While it is true that, on average, mutual funds will tend to move towards the mean performance, it does not provide a reliable prediction for any specific fund. Past performance is not a reliable indicator of future performance, and there is no guarantee that a poorly performing fund will automatically improve the next year.

The answer is option ⇒a. No, he is incorrect. Although the performance of funds will cluster around the mean on average, he cannot predict how any particular fund will do.