CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

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.
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
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