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Reversion to the Mean Phenomenon: Part I

The Seven Wonders of the Ancient World is a list of remarkable constructions of antiquity. They are the Great Pyramid of Giza, the Hanging Gardens of Babylon, the Temple of Artemis at Ephesus, the Statue of Zeus at Olympia, the Mausoleum at Halicarnassus, the Colossus of Rhodes and the Pharos of Alexandria.

 

Benjamin Franklin is often credited with adding an eighth wonder, compound interest. The financial world also provides us with a ninth candidate, reversion to the mean (RTM) of abnormal (both high and low) returns. Today, we’ll begin a series to help you understand this often misunderstood phenomenon.

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