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?

Answer 1

Answer:

The correct answer is: No, he is not correct.

Explanation:

Regression to the mean is a statistical phrase that tries to explains that is something happened at the first attempt, it is likely to happen again at a second attempt and if it happens at the second attempt it is because it almost happened at the first attempt.

Then, following the concept of regression to the mean, if a mutual fund performed badly on the last period, it is likely to perform even worse in the current period. Thus, the online investment blogger is wrong.