The Volatility Index (VIX) is the most popular measure of stock market volatility. Mike is an investor and despite the fact that the VIX is high, he still decides to buy stocks. He makes that decision because
Explanation
The history of VIX has shown that when the index is high, it is time to buy stocks. Over the years, the index soared after major events, such as the Asian Crisis in 1997 or the collapse of the LTCM hedge fun in 1998. These events caused such a loss in public confidence in the market that stock prices fell, even when volatility decreased. After a while, the market regained its confidence and stocks rose again. So buying stocks when VIX is high promises returns in the future.
Key Takeaway: When Mike makes the decision to buy stocks even when the stock market volatility is high, he makes the assumption that it is only a short phase and everything will return to normal. It is a gamble since a crisis can last for a long time and the confidence is hard to recover.
