Mean Reversion Refers to the Observation That

question 24

Multiple Choice

Mean reversion refers to the observation that

• A) stock prices overact to news announcements.
• B) stocks prices are more volatile than fluctuations in their fundamental value would predict.
• C) stocks with low returns are likely to have high returns in the future.
• D) stocks with low returns are likely to have even lower returns in the future.

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Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, showing the proportion of fixed to variable costs.

Fixed Costs

Overheads, such as rent, insurance fees, and payroll, that stay the same, independent of the amount of goods produced or sold.

Sensitivity Analysis

An analysis method to evaluate how changes in the values of an independent variable influence a dependent variable, based on a set of given assumptions.

NPV

Stands for Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment or project.