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Basic Question 0 of 7
What are correct characteristics of a random walk process?
II. It is not covariance-stationary.
III. If an AR(1) model has b0 = 1 and b1 = 0, it becomes a random walk time series.
IV. There is no best forecast of xt that can be made in period t - 1 since the value of xt is random.
I. It is not mean-reverting.
II. It is not covariance-stationary.
III. If an AR(1) model has b0 = 1 and b1 = 0, it becomes a random walk time series.
IV. There is no best forecast of xt that can be made in period t - 1 since the value of xt is random.
User Contributed Comments 3
| User | Comment |
|---|---|
| MasterD | 1) A random walk is a special case of AR(1) where B0 = 0 and B1 = 1 (not as in III). Thus the mean reverting level = B0/(1-B1) = 0/0 and thus undefined. The textbook does state that "Therefore, a first-differenced random walk has a mean-reverting level of 0." |
| nsmwaura | A random walk is where the predicted value of a series inn one period is equal to the value of the seris in the previous period plus a random error term. |
| nsmwaura | B0 can be=0 if its random walk without a drift or not=0 if its a random walk with a drift. Eitherway, the meanreverting level will be undefined. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret the standard error of estimate in a simple linear regression
CFA® 2025 Level I Curriculum, Volume 1, Module 10.