- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 5. Time-Series Analysis
- Subject 3. Random Walks
CFA Practice Question
What is the condition for equation xt = b0 + b1 xt-1 + εt if it is a random walk with drift?
B. b0 = 1; b1 = 0.
C. b0 ≠ 0; b1 = 0.
D. b0 ≠ 0; b1 = 1.
A. b0 = 0; b1 = 1.
B. b0 = 1; b1 = 0.
C. b0 ≠ 0; b1 = 0.
D. b0 ≠ 0; b1 = 1.
Correct Answer: D
If the series being fitted by a random walk model has an average upward (or downward) trend that is expected to continue in the future it is a random walk with drift.
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 |