- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 5. Time-Series Analysis
- Subject 3. Random Walks
CFA Practice Question
Which statements correctly describe the properties of the error term of a random walk process?
II. Error terms in different periods are not correlated. That is, E(εt εs) = 0 if t ≠ s.
III. The mean of the error term εt is 0. That is, E(εt) = 0.
I. The error term εt has a constant variance.
II. Error terms in different periods are not correlated. That is, E(εt εs) = 0 if t ≠ s.
III. The mean of the error term εt is 0. That is, E(εt) = 0.
Correct Answer: I, II and III
In fact, the first differenced variable of a random walk is the error term and is covariance stationary.
User Contributed Comments 1
| User | Comment |
|---|---|
| ericczhang | This is actually true by definition, since we're talking about modeling, not empirical results... |