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Basic Question 3 of 8
What is the condition for equation xt = b0 + b1 xt-1 + εt if it is a random walk with drift?
B. b0 = 1; b1 = 0.
C. b0 ≠ 0; b1 = 0.
D. b0 ≠ 0; b1 = 1.
A. b0 = 0; b1 = 1.
B. b0 = 1; b1 = 0.
C. b0 ≠ 0; b1 = 0.
D. b0 ≠ 0; b1 = 1.
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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Learning Outcome Statements
explain the instability of coefficients of time-series models;
describe characteristics of random walk processes and contrast them to covariance stationary processes;
CFA® 2025 Level II Curriculum, Volume 1, Module 5.