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Basic Question 3 of 8

What is the condition for equation xt = b0 + b1 xt-1 + εt if it is a random walk with drift?

A. b0 = 0; b1 = 1.
B. b0 = 1; b1 = 0.
C. b0 ≠ 0; b1 = 0.
D. b0 ≠ 0; b1 = 1.
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User Contributed Comments 1

User Comment
quanttrader random walk w/ no drift: b(0) = 0, b(1) = 1

w/ drift: b(0)not equal to 0, b(1) = 1 -- to adjust for the avg trend
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Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh

Craig Baugh

Learning Outcome Statements

explain the instability of coefficients of time-series models;

describe characteristics of random walk processes and contrast them to covariance stationary processes;

CFA® 2025 Level II Curriculum, Volume 1, Module 5.