- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. Time-Series Analysis
- Subject 3. Random Walks and Unit Roots

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**CFA Practice Question**

What is the condition for equation x

B. b

C. b

D. b

_{t}= b_{0}+ b_{1}x_{t-1}+ ε_{t}if it is a random walk with drift?A. b

_{0}= 0; b_{1}= 1.B. b

_{0}= 1; b_{1}= 0.C. b

_{0}≠ 0; b_{1}= 0.D. b

_{0}≠ 0; b_{1}= 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.

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**User Contributed Comments**
1

User |
Comment |
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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 |