- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 5. Time-Series Analysis
- Subject 3. Random Walks and Unit Roots

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**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(ε

III. The mean of the error term ε

I. The error term ε

_{t}has a constant variance.II. Error terms in different periods are not correlated. That is, E(ε

_{t}ε_{s}) = 0 if t ≠ s.III. The mean of the error term ε

_{t}is 0. That is, E(ε_{t}) = 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.

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**User Contributed Comments**
1

User |
Comment |
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ericczhang |
This is actually true by definition, since we're talking about modeling, not empirical results... |