CFA Practice Question

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CFA Practice Question

Which statements correctly describe the properties of the error term of a random walk process?

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...
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