### CFA Practice Question

There are 208 practice questions for this study session.

### CFA Practice Question

The AR(1) model predicts if xt is at its mean-reverting level, then

I. xt = b0/(1 - b1).
II. xt = xt-1.
III. xt = xt+1.
IV. xt = b0 + b1xt.
Correct Answer: I, II, III and IV

If a time series is currently at its mean-reverting level, then the AR(1) model predicts that the value of the time series will be the same in the next period.

User Comment
bmeisner How is II correct? Just because a series is at it's mean-reverting level in Xt doesn't mean it was at the mean-reverting level in the previous period Xt-1.
ucsbdan See P389 of the textbook: "If a time series is currently at its mean-reverting level, then the model predicts that the value of the time series will be the same in the next period." So II is correct.
rhardin That's not what bmeisner was saying... the question does not tell us if the series was at a mean reverting level last period (which would thus mean that it is mean reverting this period). So, bmeisner is correct because the question never told us if the series was at the mean reverting level last period.