Reading 22, practice problem 18a asks: Suppose credit spreads are mean reverting and that the spreads are normally distributed. Which issue is the most likely to be purchased based on mean-reverting analysis? Issue Number of standard deviations above mean A 1.0 B 2.4 C 1.3 The answer is A. However, don’t we want the issue that is the highest standard deviations above mean, so that it will contract the most, resulting in highest price gain? E.g. 2.4 is highest above mean, so will have the biggest decrease and reversion back to mean.
The answer is B.
The answer in the CFAI book is given as A. Can someone explain this please?
Correct answer is B – it will contract most. CFAI made a mistake!