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?

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Part 1

Choose the correct answer below.

A.

No, he is incorrect. The mutual fund will regress to the mean, but it may not do so for a few years.

B.

No, he is incorrect. The mutual fund will regress to the mean, but this does not mean it will have a positive return.

C.

Yes, he is correct. The mutual fund will regress to the mean, which will result in a positive return from the funds.

D.

No, he is incorrect. There is no reason to assume that mutual fund returns will regress to the mean. The fund manager may be poor at choosing stocks.