Question #1 of 105 Question ID: 1472142

Frank Batchelder and Miriam Yenkin are analysts for Bishop Econometrics. Batchelder and
Yenkin are discussing the models they use to forecast changes in China's GDP and how they
can compare the forecasting accuracy of each model. Batchelder states, "The root mean
squared error (RMSE) criterion is typically used to evaluate the in-sample forecast accuracy
of autoregressive models." Yenkin replies, "If we use the RMSE criterion, the model with the
largest RMSE is the one we should judge as the most accurate."

With regard to their statements about using the RMSE criterion:

A) Batchelder is correct; Yenkin is incorrect.

B) Batchelder is incorrect; Yenkin is incorrect.
C) Batchelder is incorrect; Yenkin is correct.

Question #2 of 105 Question ID: 1472130

Consider the estimated model xt = -6.0 + 1.1 xt-1 + 0.3 xt-2 + εt that is estimated over 50

periods. The value of the time series for the 49th observation is 20 and the value of the time
series for the 50th observation is 22. What is the forecast for the 51st observation?

A) 23
B) 24.2.
C) 30.2.

Question #3 of 105 Question ID: 1472092

In the time series model: yt=b0 + b1 t + εt, t=1,2,...,T, the:

A) change in the dependent variable per time period is b1.

B) disturbance term is mean-reverting.

C) disturbance terms are autocorrelated.
Jason Cranwell, CFA, has hypothesized that sales of luxury cars have grown at a constant
rate over the past 15 years.

Question #4 - 7 of 105 Question ID: 1472114

After discussing the above matter with a colleague, Cranwell finally decides to use an
autoregressive model of order one i.e. AR(1) for the above data. Below is a summary of the
findings of the model:

b0 0.4563

b1 0.6874

Standard error 0.3745

R-squared 0.7548

Durbin Watson 1.23

F 12.63

Observations 180

Calculate the mean reverting level of the series.

A) 1.26.
B) 1.46.
C) 1.66.

Question #5 - 7 of 105 Question ID: 1472115

Cranwell is aware that the Dickey Fuller test can be used to discover whether a model has a
unit root. He is also aware that the test would use a revised set of critical t-values. What
would it mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0) ?

A) There is no unit root.

B) There is a unit root and the model cannot be used in its current form.
C) There is a unit root but the model can be used if covariance-stationary.
Question #6 - 7 of 105 Question ID: 1472116

Cranwell would also like to test for serial correlation in his AR(1) model. To do this, Cranwell
should:

A) use the provided Durbin Watson statistic and compare it to a critical value.
B) use a t-test on the residual autocorrelations over several lags.
determine if the series has a finite and constant covariance between leading and
C)
lagged terms of itself.

Question #7 - 7 of 105 Question ID: 1472117

When using the root mean squared error (RMSE) criterion to evaluate the predictive power
of the model, which of the following is the most appropriate statement?

A) Use the model with the highest RMSE calculated using the in-sample data.
B) Use the model with the lowest RMSE calculated using the out-of-sample data.
C) Use the model with the lowest RMSE calculated using the in-sample data.

Question #8 of 105 Question ID: 1472162

Which of the following statements regarding unit roots in a time series is least accurate?

A) A time series with a unit root is not covariance stationary.

Even if a time series has a unit root, the predictions from the estimated model are
B)
valid.
C) A time series that is a random walk has a unit root.

Question #9 of 105 Question ID: 1472155

Barry Phillips, CFA, has the following time series observations from earliest to latest: (5, 6, 5,
7, 6, 6, 8, 8, 9, 11). Phillips transforms the series so that he will estimate an autoregressive
process on the following data (1, -1, 2, -1, 0, 2, 0, 1, 2). The transformation Phillips employed
is called:

A) beta drift.
B) moving average.
C) first differencing.

Question #10 of 105 Question ID: 1472189

The table below shows the autocorrelations of the lagged residuals for the first differences
of the natural logarithm of quarterly motorcycle sales that were fit to the AR(1) model: (ln
salest − ln salest − 1) = b0 + b1(ln salest − 1 − ln salest − 2) + εt. The critical t-statistic at 5%
significance is 2.0, which means that there is significant autocorrelation for the lag-4
residual, indicating the presence of seasonality. Assuming the time series is covariance
stationary, which of the following models is most likely to CORRECT for this apparent
seasonality?

Lagged Autocorrelations of First Differences in the Log of Motorcycle Sales

Lag Autocorrelation Standard Error t-Statistic

1 −0.0738 0.1667 −0.44271

2 −0.1047 0.1667 −0.62807

3 −0.0252 0.1667 −0.15117

4 0.5528 0.1667 3.31614

(ln salest − ln salest − 1) = b0 + b1(ln salest − 1 − ln salest − 2) + b2(ln salest − 4 − ln

A)
salest − 5) + εt.

B) (ln salest − ln salest − 4) = b0 + b1(ln salest − 1 − ln salest − 2) + εt.

C) ln salest = b0 + b1(ln salest − 1) − b2(ln salest − 4) + εt.

Question #11 of 105 Question ID: 1472119

Which of the following statements regarding covariance stationarity is CORRECT?

The estimation results of an AR model involving a time series that is not covariance
A)
stationary are meaningless.
B) A time series may be both covariance stationary and heteroskedastic.
A time series that is covariance stationary may have residuals whose mean changes
C)
over time.

Question #12 of 105 Question ID: 1472188

Which of the following statements regarding seasonality is least accurate?

A time series that is first differenced can be adjusted for seasonality by

A) incorporating the first-differenced value for the previous year's corresponding
period.
Not correcting for seasonality when, in fact, seasonality exists in the time series
B)
results in a violation of an assumption of linear regression.
The presence of seasonality makes it impossible to forecast using a time-series
C)
model.

Question #13 of 105 Question ID: 1472192

Which of the following is least likely a consequence of a model containing ARCH(1) errors?
The:

A) regression parameters will be incorrect.

B) model's specification can be corrected by adding an additional lag variable.
C) variance of the errors can be predicted.

Question #14 of 105 Question ID: 1472141

Suppose that the time series designated as Y is mean reverting. If Yt+1 = 0.2 + 0.6 Yt, the best
prediction of Yt+1 is:

A) 0.5.
B) 0.8.
C) 0.3.

Question #15 of 105 Question ID: 1472131

An analyst wants to model quarterly sales data using an autoregressive model. She has
found that an AR(1) model with a seasonal lag has significant slope coefficients. She also
finds that when a second and third seasonal lag are added to the model, all slope
coefficients are significant too. Based on this, the best model to use would most likely be an:

A) AR(1) model with no seasonal lags.

B) AR(1) model with 3 seasonal lags.
C) ARCH(1).

Question #16 of 105 Question ID: 1472186

Barry Phillips, CFA, is analyzing quarterly data. He has estimated an AR(1) relationship (xt =
b0 + b1 × xt-1 + et) and wants to test for seasonality. To do this he would want to see if which
of the following statistics is significantly different from zero?

A) Correlation(et, et-4).

B) Correlation(et, et-5).

C) Correlation(et, et-1).

Question #17 of 105 Question ID: 1472143

Which of the following statements regarding an out-of-sample forecast is least accurate?

 Out-of-sample forecasts are of more importance than in-sample forecasts to the
A)
analyst using an estimated time-series model.
B) Forecasting is not possible for autoregressive models with more than two lags.
There is more error associated with out-of-sample forecasts, as compared to in-
C)
sample forecasts.

Question #18 of 105 Question ID: 1472127

Troy Dillard, CFA, has estimated the following equation using semiannual data: xt = 44 +
0.1×xt– 1 – 0.25×xt– 2 - 0.15×xt– 3 + et. Given the data in the table below, what is Dillard's best
forecast of the second half of 2007?

Time Value

2003: I 31

2003: II 31

2004: I 33

2004: II 33

2005: I 36

2005: II 35

2006: I 32

2006: II 33

A) 33.74.
B) 34.36.
C) 34.05.

Question #19 of 105 Question ID: 1472191

Suppose you estimate the following model of residuals from an autoregressive model:

εt2 = 0.25 + 0.6ε2t-1 + µt, where ε = ε^

If the residual at time t is 0.9, the forecasted variance for time t+1 is:

A) 0.850.
B) 0.736.
C) 0.790.

Question #20 of 105 Question ID: 1472133

The procedure for determining the structure of an autoregressive model is:

estimate an autoregressive model (for example, an AR(1) model), calculate the

A) autocorrelations for the model's residuals, test whether the autocorrelations are
different from zero, and add an AR lag for each significant autocorrelation.
estimate an autoregressive model (e.g., an AR(1) model), calculate the
B) autocorrelations for the model's residuals, test whether the autocorrelations are
different from zero, and revise the model if there are significant autocorrelations.
test autocorrelations of the residuals for a simple trend model, and specify the
C)
number of significant lags.

Question #21 of 105 Question ID: 1472094

Modeling the trend in a time series of a variable that grows at a constant rate with
continuous compounding is best done with:

A) a moving average model.

B) a log-linear transformation of the time series.
C) simple linear regression.

Bill Johnson, CFA, has prepared data concerning revenues from sales of winter clothing
made by Polar Corporation. This data is presented (in $ millions) in the following table:
 Change In Sales Lagged Change Seasonal Lagged
In Sales Change In Sales

Quarter Sales Y Y + (−1) Y + (−4)

2013.1 182

2013.2 74 −108

2013.3 78 4 −108

2013.4 242 164 4

2014.1 194 −48 164

2014.2 79 −115 −48 −108

2014.3 90 11 −115 4

2014.4 260 170 11 w

Question #22 - 27 of 105 Question ID: 1472165

The preceding table will be used by Johnson to forecast values using:

A) a log-linear trend model with a seasonal lag.

B) a serially correlated model with a seasonal lag.
C) an autoregressive model with a seasonal lag.

Question #23 - 27 of 105 Question ID: 1472166

The value that Johnson should enter in the table in place of "w" is:

A) −115.
B) 164.
C) −48.

Question #24 - 27 of 105 Question ID: 1472167

Imagine that Johnson prepares a change-in-sales regression analysis model with seasonality,
which includes the following:

Coefficients

Intercept −6.032

Lag 1 0.017

Lag 4 0.983

Based on the model, expected sales in the first quarter of 2015 will be closest to:

A) 210.
B) 155.
C) 190.

Question #25 - 27 of 105 Question ID: 1472168

Johnson's model was most likely designed to incorporates correction for:

A) nonstationarity in time series data.

B) heteroskedasticity of model residuals.
C) cointegration in the time series.

Question #26 - 27 of 105 Question ID: 1472169

To test for covariance-stationarity in the data, Johnson would most likely use a:

A) t-test.
B) Durbin-Watson test.
C) Dickey-Fuller test.

Question #27 - 27 of 105 Question ID: 1472170

The presence of conditional heteroskedasticity of residuals in Johnson's model is would
most likely to lead to:

A) invalid standard errors of regression coefficients and invalid statistical tests.

B) invalid estimates of regression coefficients, but the standard errors will still be valid.
invalid standard errors of regression coefficients, but statistical tests will still be
C)
valid.

Question #28 of 105 Question ID: 1472129

Consider the estimated model xt = −6.0 + 1.1 xt − 1 + 0.3 xt − 2 + εt that is estimated over 50

periods. The value of the time series for the 49th observation is 20 and the value of the time
series for the 50th observation is 22. What is the forecast for the 52nd observation?

A) 24.2.
B) 42
C) 27.22.

Question #29 of 105 Question ID: 1472156

Suppose that the following time-series model is found to have a unit root:

Salest = b0 + b1 Sales t-1+ εt

What is the specification of the model if first differences are used?

A) (Salest - Salest-1)= b0 + b1 (Sales t-1 - Sales t-2) + εt.

B) Salest = b1 Sales t-1+ εt.

C) Salest = b0 + b1 Sales t-1 + b2 Sales t-2 + εt.

Question #30 of 105 Question ID: 1472139

The regression results from fitting an AR(1) to a monthly time series are presented below.
What is the mean-reverting level for the model?

Model: ΔExpt = b0 + b1ΔExpt–1 + εt

Coefficients Standard Error t-Statistic p-value

Intercept 1.3304 0.0089 112.2849 < 0.0001

Lag-1 0.1817 0.0061 30.0125 < 0.0001

A) 1.6258.
B) 7.3220.
C) 0.6151.

Question #31 of 105 Question ID: 1472134

The regression results from fitting an AR(1) model to the first-differences in enrollment
growth rates at a large university includes a Durbin-Watson statistic of 1.58. The number of
quarterly observations in the time series is 60. At 5% significance, the critical values for the
Durbin-Watson statistic are dl = 1.55 and du = 1.62. Which of the following is the most
accurate interpretation of the DW statistic for the model?

A) Since DW > dl, the null hypothesis of no serial correlation is rejected.

B) The Durbin-Watson statistic cannot be used with AR(1) models.

C) Since dl < DW < du, the results of the DW test are inconclusive.

Question #32 of 105 Question ID: 1472144

William Zox, an analyst for Opal Mountain Capital Management, uses two different models
to forecast changes in the inflation rate in the United Kingdom. Both models were
constructed using U.K. inflation data from 1988-2002. In order to compare the forecasting
accuracy of the models, Zox collected actual U.K. inflation data from 2004-2005, and
compared the actual data to what each model predicted. The first model is an AR(1) model
that was found to have an average squared error of 10.429 over the 12 month period. The
second model is an AR(2) model that was found to have an average squared error of 11.642
over the 12 month period. Zox then computed the root mean squared error for each model
to use as a basis of comparison. Based on the results of his analysis, which model should
Zox conclude is the most accurate?

A) Model 1 because it has an RMSE of 3.23.

B) Model 2 because it has an RMSE of 3.41.
C) Model 1 because it has an RMSE of 5.21.

Question #33 of 105 Question ID: 1472149

David Brice, CFA, has tried to use an AR(1) model to predict a given exchange rate. Brice has
concluded the exchange rate follows a random walk without a drift. The current value of the
exchange rate is 2.2. Under these conditions, which of the following would be least likely?

A) The residuals of the forecasting model are autocorrelated.

B) The forecast for next period is 2.2.
C) The process is not covariance stationary.

Question #34 of 105 Question ID: 1472152

Given an AR(1) process represented by xt+1 = b0 + b1×xt + et, the process would not be a
random walk if:

A) the long run mean is b0 / (1-b1).

B) b1 = 1.

C) E(et)=0.
Yolanda Seerveld is an analyst studying the growth of sales of a new restaurant chain called
Very Vegan. The increase in the public's awareness of healthful eating habits has had a very
positive effect on Very Vegan's business. Seerveld has gathered quarterly data for the
restaurant's sales for the past three years. Over the twelve periods, sales grew from $17.2
million in the first quarter to $106.3 million in the last quarter. Because Very Vegan has
experienced growth of more than 500% over the three years, the Seerveld suspects an
exponential growth model may be more appropriate than a simple linear trend model.
However, she begins by estimating the simple linear trend model:

(sales)t = α + β × (Trend)t + εt

Where the Trend is 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12.

Regression Statistics

Multiple R 0.952640

R2 0.907523

Adjusted R2 0.898275

Standard Error 8.135514

Observations 12

1st order autocorrelation coefficient of the residuals: −0.075

ANOVA

df SS

Regression 1 6495.203

Residual 10 661.8659

Total 11 7157.069

Coefficients Standard Error

Intercept 10.0015 5.0071

Trend 6.7400 0.6803

The analyst then estimates the following model:

(natural logarithm of sales)t = α + β × (Trend)t + εt

Regression Statistics
 Multiple R 0.952028

R2 0.906357

Adjusted R2 0.896992

Standard Error 0.166686

Observations 12

1st order autocorrelation coefficient of the residuals: −0.348

ANOVA

df SS

Regression 1 2.6892

Residual 10 0.2778

Total 11 2.9670

Coefficients Standard Error

Intercept 2.9803 0.1026

Trend 0.1371 0.0140

Seerveld compares the results based upon the output statistics and conducts two-tailed
tests at a 5% level of significance. One concern is the possible problem of autocorrelation,
and Seerveld makes an assessment based upon the first-order autocorrelation coefficient of
the residuals that is listed in each set of output. Another concern is the stationarity of the
data. Finally, the analyst composes a forecast based on each equation for the quarter
following the end of the sample.

Question #35 - 38 of 105 Question ID: 1472106

Are either of the slope coefficients statistically significant?

A) The simple trend regression is not, but the log-linear trend regression is.
B) Yes, both are significant.
C) The simple trend regression is, but not the log-linear trend regression.
Question #36 - 38 of 105 Question ID: 1472107

With respect to the possible problems of autocorrelation and nonstationarity, using the log-
linear transformation appears to have:

A) not improved the results for either possible problems.

B) improved the results for nonstationarity but not autocorrelation.
C) improved the results for autocorrelation but not nonstationarity.

Question #37 - 38 of 105 Question ID: 1472108

Using the simple linear trend model, the forecast of sales for Very Vegan for the first out-of-
sample period is:

A) $97.6 million.
B) $113.0 million.
C) $123.0 million.

Question #38 - 38 of 105 Question ID: 1472109

Using the log-linear trend model, the forecast of sales for Very Vegan for the first out-of-
sample period is:

A) $109.4 million.
B) $117.0 million.
C) $121.2 million.

Question #39 of 105 Question ID: 1472135

The table below includes the first eight residual autocorrelations from fitting the first
differenced time series of the absenteeism rates (ABS) at a manufacturing firm with the
model ΔABSt = b0 + b1ΔABSt-1 + εt. Based on the results in the table, which of the following
statements most accurately describes the appropriateness of the specification of the model,
ΔABSt = b0 + b1ΔABSt-1 + εt?

Lagged Autocorrelations of the Residuals of the First Differences in Absenteeism

Rates

Lag Autocorrelation Standard Error t-Statistic

1 −0.0738 0.1667 −0.44271

2 −0.1047 0.1667 −0.62807

3 −0.0252 0.1667 −0.15117

4 −0.0157 0.1667 −0.09418

5 −0.1262 0.1667 −0.75705

6 0.0768 0.1667 0.46071

7 0.0038 0.1667 0.02280

8 −0.0188 0.1667 −0.11278

The Durbin-Watson statistic is needed to determine the presence of significant

A)
correlation of the residuals.
The negative values for the autocorrelations indicate that the model does not fit the
B)
time series.
C) The low values for the t-statistics indicate that the model fits the time series.

Question #40 of 105 Question ID: 1472111

Trend models can be useful tools in the evaluation of a time series of data. However, there
are limitations to their usage. Trend models are not appropriate when which of the following
violations of the linear regression assumptions is present?

A) Heteroskedasticity.
B) Serial correlation.
C) Model misspecification.
Question #41 of 105 Question ID: 1472132

The model xt = b0 + b1 xt − 1 + b2 xt − 2 + b3 xt −12 + εt is an autoregressive model of type:

A) AR(12).
B) AR(1).
C) AR(2).

Question #42 of 105 Question ID: 1472126

The model xt = b0 + b1 xt-1 + b2 xt-2 + b3 xt-3 + b4 xt-4 + εt is:

A) a moving average model, MA(4).

B) an autoregressive conditional heteroskedastic model, ARCH.
C) an autoregressive model, AR(4).

Albert Morris, CFA, is evaluating the results of an estimation of the number of wireless
phone minutes used on a quarterly basis within the territory of Car-tel International, Inc.
Some of the information is presented below (in billions of minutes):

Wireless Phone Minutes (WPM)t = b0 + b1 WPMt–1 + εt

ANOVA Degrees of Freedom Sum of Squares Mean Square

Regression 1 7,212.641 7,212.641

Error 26 3,102.410 119.324

Total 27 10,315.051

Coefficients Coefficient Standard Error of the Coefficient

Intercept –8.0237 2.9023

WPMt–1 1.0926 0.0673

The variance of the residuals from one time period within the time series is not dependent
on the variance of the residuals in another time period.
Morris also models the monthly revenue of Car-tel using data over 96 monthly observations.
The model is shown below:

Sales (CAD$ millions) = b0 + b1 Salest−1 + εt

Coefficients Coefficient Standard Error of the Coefficient

Intercept 43.2 12.32

Salest−1 0.8867 0.4122

Question #43 - 46 of 105 Question ID: 1472101

The value for WPM this period is 544 billion. Using the results of the model, the forecast
Wireless Phone Minutes three periods in the future is:

A) 691.30.
B) 586.35.
C) 683.18.

Question #44 - 46 of 105 Question ID: 1472102

The WPM model was specified as a(n):

A) Moving Average (MA) Model.

B) Autoregressive (AR) Model.
C) Autoregressive (AR) Model with a seasonal lag.

Question #45 - 46 of 105 Question ID: 1472103

The mean reverting level of monthly sales is closest to:

A) 381.29 million.
B) 8.83 million.
C) 43.2 million.
Question #46 - 46 of 105 Question ID: 1472104

Morris concludes that the current price of Car-tel stock is consistent with single stage
constant growth model (with g=3%). Based on this information, the sales model is most
likely:

Incorrectly specified and first differencing the data would be an appropriate

A)
remedy.
B) Correctly specified.
Incorrectly specified and first differencing the natural log of the data would be an
C)
appropriate remedy.

Question #47 of 105 Question ID: 1472148

Which of the following statements regarding the instability of time-series models is most
accurate? Models estimated with:

A) shorter time series are usually more stable than those with longer time series.
a greater number of independent variables are usually more stable than those with
B)
a smaller number.
C) longer time series are usually more stable than those with shorter time series.

Question #48 of 105 Question ID: 1472185

Which of the following is a seasonally adjusted model?

A) Salest = b1 Sales t-1+ εt.

B) Salest = b0 + b1 Sales t-1 + b2 Sales t-2 + εt.

C) (Salest - Sales t-1)= b0 + b1 (Sales t-1 - Sales t-2) + b2 (Sales t-4 - Sales t-5) + εt.

Question #49 of 105 Q estion ID: 1472193

Question #49 of 105 Question ID: 1472193

Suppose you estimate the following model of residuals from an autoregressive model:

εt2 = 0.4 + 0.80εt-12 + µt, where ε = ε^

If the residual at time t is 2.0, the forecasted variance for time t+1 is:

A) 3.6.
B) 3.2.
C) 2.0.

Question #50 of 105 Question ID: 1472187

The table below shows the autocorrelations of the lagged residuals for quarterly theater
ticket sales that were estimated using the AR(1) model: ln(salest) = b0 + b1(ln salest − 1) + et.
Assuming the critical t-statistic at 5% significance is 2.0, which of the following is the most
likely conclusion about the appropriateness of the model? The time series:

Lagged Autocorrelations of the Log of Quarterly Theater Ticket Sales

Lag Autocorrelation Standard Error t-Statistic

1 −0.0738 0.1667 −0.44271

2 −0.1047 0.1667 −0.62807

3 −0.0252 0.1667 −0.15117

4 0.5528 0.1667 3.31614

A) contains ARCH (1) errors.

B) contains seasonality.
C) would be more appropriately described with an MA(4) model.

Question #51 of 105 Question ID: 1472204

Alexis Popov, CFA, is analyzing monthly data. Popov has estimated the model xt = b0 + b1 ×
xt-1 + b2 × xt-2 + et. The researcher finds that the residuals have a significant ARCH process.
The best solution to this is to:

A) re-estimate the model with generalized least squares.

B) re-estimate the model using only an AR(1) specification.
C) re-estimate the model using a seasonal lag.

Question #52 of 105 Question ID: 1472154

Barry Phillips, CFA, has estimated an AR(1) relationship (xt = b0 + b1 × xt-1 + et) and got the
following result: xt+1 = 0.5 + 1.0xt + et. Phillips should:

A) not first difference the data because b0 = 0.5 < 1.

B) first difference the data because b1 = 1.

C) not first difference the data because b1 − b0 = 1.0 − 0.5 = 0.5 < 1.

Question #53 of 105 Question ID: 1472110

Dianne Hart, CFA, is considering the purchase of an equity position in Book World, Inc, a
leading seller of books in the United States. Hart has obtained monthly sales data for the
past seven years, and has plotted the data points on a graph. Hart notices that the revenues
are growing at approximately 4.5% per year. Which of the following statements regarding
Hart's analysis of the data time series of Book World's sales is most accurate? Hart should
utilize a:

mean-reverting model to analyze the data because the time series pattern is
A)
covariance stationary.
B) linear model to analyze the data because the mean appears to be constant.
log-linear model to analyze the data because it is likely to exhibit a compound
C)
growth trend.
Question #54 of 105 Question ID: 1472093

David Wellington, CFA, has estimated the following log-linear trend model: LN(xt) = b0 + b1t +
εt. Using six years of quarterly observations, 2001:I to 2006:IV, Wellington gets the following
estimated equation: LN(xt) = 1.4 + 0.02t. The first out-of-sample forecast of xt for 2007:I is
closest to:

A) 4.14.
B) 1.88.
C) 6.69.

Vikas Rathod, an enrolled candidate for the CFA Level II examination, has decided to perform
a calendar test to examine whether there is any abnormal return associated with
investments and disinvestments made in blue-chip stocks on particular days of the week. As
a proxy for blue-chips, he has decided to use the S&P 500 index. The analysis will involve the
use of dummy variables and is based on the past 780 trading days. Here are selected
findings of his study:

RSS 0.0039

SSE 0.9534

SST 0.9573

R-squared 0.004

SEE 0.035

Jessica Jones, CFA, a friend of Rathod, overhears that he is interested in regression analysis
and warns him that whenever heteroskedasticity is present in multiple regression this could
undermine the regression results. She mentions that one easy way to spot conditional
heteroskedasticity is through a scatter plot, but she adds that there is a more formal test.
Unfortunately, she can't quite remember its name. Jessica believes that heteroskedasticity
can be rectified using White-corrected standard errors. Her son Jonathan who has also taken
part in the discussion, hears this comment and argues that White correction would typically
reduce the number of Type I errors in financial data.

Question #55 - 60 of 105 Question ID: 1472195

How many dummy variables should Rathod use?

A) Five
B) Four
C) Six

Question #56 - 60 of 105 Question ID: 1472196

What is most likely represented by the intercept of the regression?

A) The intercept is not a driver of returns, only the independent variables.

B) The return on a particular trading day.
C) The drift of a random walk.

Question #57 - 60 of 105 Question ID: 1472197

What can be said of the overall explanatory power of the model at the 5% significance?

A) There is no value to calendar trading.

The coefficient of determination for the above regression is significantly higher than
B)
the standard error of the estimate, and therefore there is value to calendar trading.
C) There is value to calendar trading.

Question #58 - 60 of 105 Question ID: 1472198

The test mentioned by Jessica is known as the:

A) Durbin-Watson, which is a two-tailed test

B) Breusch-Pagan, which is a one-tailed test
C) Breusch-Pagan, which is a two-tailed test

Question #59 - 60 of 105 Question ID: 1472199

Are Jessica and her son Jonathan, correct in terms of the method used to correct for
heteroskedasticity and the likely effects?

A) Both are correct

B) One is correct
C) Neither is correct

Question #60 - 60 of 105 Question ID: 1472200

Assuming the a1 term of an ARCH(1) model is significant, the following can be forecast:

A) The variance of the error term.

B) A significant a1 implies that the ARCH framework cannot be used.
C) The square of the error term.

Question #61 of 105 Question ID: 1472205

Alexis Popov, CFA, wants to estimate how sales have grown from one quarter to the next on
average. The most direct way for Popov to estimate this would be:

A) a linear trend model.

B) an AR(1) model.
C) an AR(1) model with a seasonal lag.

Question #62 of 105 Question ID: 1472163

An AR(1) autoregressive time series model:

A) can be used to test for a unit root, which exists if the slope coefficient equals one.
can be used to test for a unit root, which exists if the slope coefficient is less than
B)
one.
C) cannot be used to test for a unit root.
Question #63 of 105 Question ID: 1472202

Consider the following estimated model:

(Salest - Sales t-1) = 30 + 1.25 (Sales t-1 - Sales t-2) + 1.1 (Sales t-4 - Sales t-5) t=1,2,.. T

and Sales for the periods 1999.1 through 2000.2:

t Period Sales

T 2000.2 $2,000

T-1 2000.1 $1,800

T-2 1999.4 $1,500

T-3 1999.3 $1,400

T-4 1999.2 $1,900

T-5 1999.1 $1,700

The forecasted Sales amount for 2000.3 is closest to:

A) $1,730.00
B) $2,625.00
C) $2,270.00

Question #64 of 105 Question ID: 1472118

To qualify as a covariance stationary process, which of the following does not have to be
true?

A) Covariance(xt, xt-2) = Covariance(xt, xt+2).

B) Covariance(xt, xt-1) = Covariance(xt, xt-2).

C) E[xt] = E[xt+1].

Question #65 of 105 Question ID: 1472138

Q Question ID: 1472138

Which of the following statements regarding a mean reverting time series is least accurate?

If the current value of the time series is above the mean reverting level, the
A)
prediction is that the time series will increase.
If the current value of the time series is above the mean reverting level, the
B)
prediction is that the time series will decrease.

C) If the time-series variable is x, then xt = b0 + b1xt-1.

Question #66 of 105 Question ID: 1472140

David Brice, CFA, has used an AR(1) model to forecast the next period's interest rate to be
0.08. The AR(1) has a positive slope coefficient. If the interest rate is a mean reverting
process with an unconditional mean, a.k.a., mean reverting level, equal to 0.09, then which
of the following could be his forecast for two periods ahead?

A) 0.081.
B) 0.072.
C) 0.113.

Question #67 of 105 Question ID: 1472120

Which of the following is NOT a requirement for a series to be covariance stationary? The:

A) time series must have a positive trend.

B) expected value of the time series is constant over time.
C) covariance of the time series with itself (lead or lag) must be constant.

Question #68 of 105 Question ID: 1472136

An analyst modeled the time series of annual earnings per share in the specialty department
store industry as an AR(3) process. Upon examination of the residuals from this model, she
found that there is a significant autocorrelation for the residuals of this model. This indicates
that she needs to:

A) alter the model to an ARCH model.

B) switch models to a moving average model.
C) revise the model to include at least another lag of the dependent variable.

Question #69 of 105 Question ID: 1472128

Troy Dillard, CFA, has estimated the following equation using quarterly data: xt = 93 - 0.5×xt–

1 + 0.1×xt– 4 + et. Given the data in the table below, what is Dillard's best estimate of the first

quarter of 2007?

Time Value

2005: I 62

2005: II 62

2005: III 66

2005: IV 66

2006: I 72

2006: II 70

2006: III 64

2006: IV 66

A) 66.60.
B) 67.20.
C) 66.40.

Question #70 of 105 Question ID: 1472112

Rhonda Wilson, CFA, is analyzing sales data for the TUV Corp, a current equity holding in her
portfolio. She observes that sales for TUV Corp. have grown at a steadily increasing rate over
the past ten years due to the successful introduction of some new products. Wilson
anticipates that TUV will continue this pattern of success. Which of the following models is
most appropriate in her analysis of sales for TUV Corp?

A linear trend model, because the data series is equally distributed above and below
A)
the line and the mean is constant.
A log-linear trend model, because the data series can be graphed using a straight,
B)
upward-sloping line.
A log-linear trend model, because the data series exhibits a predictable, exponential
C)
growth trend.

Question #71 of 105 Question ID: 1472146

The primary concern when deciding upon a time series sample period is which of the
following factors?

A) Current underlying economic and market conditions.

B) The length of the sample time period.
C) The total number of observations.

Question #72 of 105 Question ID: 1472147

The main reason why financial and time series intrinsically exhibit some form of
nonstationarity is that:

most financial and time series have a natural tendency to revert toward their
A)
means.
most financial and economic relationships are dynamic and the estimated
B)
regression coefficients can vary greatly between periods.
serial correlation, a contributing factor to nonstationarity, is always present to a
C)
certain degree in most financial and time series.
Question #73 of 105 Question ID: 1472145

Consider the estimated AR(2) model, xt = 2.5 + 3.0 xt-1 + 1.5 xt-2 + εt t=1,2,...50. Making a
prediction for values of x for 1 ≤ t ≤ 50 is referred to as:

A) an in-sample forecast.
B) requires more information to answer the question.
C) an out-of-sample forecast.

Housing industry analyst Elaine Smith has been assigned the task of forecasting housing
foreclosures. Specifically, Smith is asked to forecast the percentage of outstanding
mortgages that will be foreclosed upon in the coming quarter. Smith decides to employ
multiple linear regression and time series analysis.

Besides constructing a forecast for the foreclosure percentage, Smith wants to address the
following two questions:

Research Question Is the foreclosure percentage significantly affected by short-term

1: interest rates?

Research Question Is the foreclosure percentage significantly affected by government

2: intervention policies?

Smith contends that adjustable rate mortgages often are used by higher risk borrowers and
that their homes are at higher risk of foreclosure. Therefore, Smith decides to use short-
term interest rates as one of the independent variables to test Research Question 1.

To measure the effects of government intervention in Research Question 2, Smith uses a

dummy variable that equals 1 whenever the Federal government intervened with a fiscal
policy stimulus package that exceeded 2% of the annual Gross Domestic Product. Smith sets
the dummy variable equal to 1 for four quarters starting with the quarter in which the policy
is enacted and extending through the following 3 quarters. Otherwise, the dummy variable
equals zero.

Smith uses quarterly data over the past 5 years to derive her regression. Smith's regression
equation is provided in Exhibit 1:

Exhibit 1: Foreclosure Share Regression Equation

foreclosure share = b0 + b1(ΔINT) + b2(STIM) + b3(CRISIS) + ε

where:
 Foreclosure = the percentage of all outstanding mortgages foreclosed upon during
share the quarter

= the quarterly change in the 1-year Treasury bill rate (e.g., ΔINT = 2 for a
ΔINT
two percentage point increase in interest rates)

STIM = 1 for quarters in which a Federal fiscal stimulus package was in place

= 1 for quarters in which the median house price is one standard

CRISIS
deviation below its 5-year moving average

The results of Smith's regression are provided in Exhibit 2:

Exhibit 2: Foreclosure Share Regression Results

Variable Coefficient t-statistic

Intercept 3.00 2.40

ΔINT 1.00 2.22

STIM -2.50 -2.10

CRISIS 4.00 2.35

The ANOVA results from Smith's regression are provided in Exhibit 3:

Exhibit 3: Foreclosure Share Regression Equation ANOVA Table

Degrees of
Source Sum of Squares Mean Sum of Squares
Freedom

Regression 3 15 5.0000

Error 16 5 0.3125

Total 19 20

Smith expresses the following concerns about the test statistics derived in her regression:

If my regression errors exhibit conditional heteroskedasticity, my t-

Concern 1:
statistics will be underestimated.

If my independent variables are correlated with each other, my F-statistic

Concern 2:
will be overestimated.

Before completing her analysis, Smith runs a regression of the changes in foreclosure share
on its lagged value. The following regression results and autocorrelations were derived using
quarterly data over the past 5 years ( Exhibit 4 and Exhibit 5, respectively):

Exhibit 4. Lagged Regression Results

Δ foreclosure sharet = 0.05 + 0.25(Δ foreclosure sharet– 1)

Exhibit 5. Autocorrelation Analysis

Lag Autocorrelation t-statistic

1 0.05 0.22

2 -0.35 -1.53

3 0.25 1.09

4 0.10 0.44

Exhibit 6 provides critical values for the Student's t-Distribution

Exhibit 6: Critical Values for Student's t-Distribution

Area in Both Tails Combined

Degrees of Freedom 20% 10% 5% 1%

16 1.337 1.746 2.120 2.921

17 1.333 1.740 2.110 2.898

18 1.330 1.734 2.101 2.878

19 1.328 1.729 2.093 2.861

20 1.325 1.725 2.086 2.845

Question #74 - 79 of 105 Question ID: 1472179

The most appropriate interpretation from the foreclosure share regression equation model
is:

A) Multiple-R of the model is 0.75.

B) Variable STIM explains 37.5% of the variation in foreclosure share.
C) Multiple-R of the model is 0.87.
Question #75 - 79 of 105 Question ID: 1472180

Based on her regression results in Exhibit 2, using a 5% level of significance, Smith should
conclude that:

stimulus packages have significant effects on foreclosure percentages, but housing

A)
crises do not have significant effects on foreclosure percentages.
stimulus packages do not have significant effects on foreclosure percentages, but
B)
housing crises do have significant effects on foreclosure percentages.
both stimulus packages and housing crises have significant effects on foreclosure
C)
percentages.

Question #76 - 79 of 105 Question ID: 1472181

The standard error of estimate for Smith's regression is closest to:

A) 0.53
B) 0.56
C) 0.16

Question #77 - 79 of 105 Question ID: 1472182

Is Smith correct or incorrect regarding Concerns 1 and 2?

A) Incorrect on both Concerns.

B) Correct on both Concerns.
C) Only correct on one concern and incorrect on the other.

Question #78 - 79 of 105 Question ID: 1472183

The most recent change in foreclosure share was +1 percent. Smith decides to base her
analysis on the data and methods provided in Exhibit 4 and Exhibit 5, and determines that
the two-step ahead forecast for the change in foreclosure share (in percent) is 0.125, and
that the mean reverting value for the change in foreclosure share (in percent) is 0.071. Is
Smith correct?

Smith is correct on the mean-reverting level for forecast of change in foreclosure

A)
share only.
Smith is correct on the two-step ahead forecast for change in foreclosure share
B)
only.
C) Smith is correct on both the forecast and the mean reverting level.

Question #79 - 79 of 105 Question ID: 1472184

Assume for this question that Smith finds that the foreclosure share series has a unit root.
Under these conditions, she can most reliably regress foreclosure share against the change
in interest rates (ΔINT) if:

A) ΔINT has unit root and is not cointegrated with foreclosure share.
B) ΔINT has unit root and is cointegrated with foreclosure share.
C) ΔINT does not have unit root.

Question #80 of 105 Question ID: 1472151

A time series x that is a random walk with a drift is best described as:

A) xt = b0 + b1 xt − 1.

B) xt = b0 + b1xt − 1 + εt.

C) xt = xt − 1 + εt.

Question #81 of 105 Question ID: 1472190

The data below yields the following AR(1) specification: xt = 0.9 – 0.55xt-1 + Et , and the
indicated fitted values and residuals.

Time xt fitted values residuals

1 1 - -

2 -1 0.35 -1.35

3 2 1.45 0.55

4 -1 -0.2 -0.8

5 0 1.45 -1.45

6 2 0.9 1.1

7 0 -0.2 0.2

8 1 0.9 0.1

9 2 0.35 1.65

The following sets of data are ordered from earliest to latest. To test for ARCH, the
researcher should regress:

(1.8225, 0.3025, 0.64, 2.1025, 1.21, 0.04, 0.01) on (0.3025, 0.64, 2.1025, 1.21, 0.04,
A)
0.01, 2.7225).
B) (1, 4, 1, 0, 4, 0, 1, 4) on (1, 1, 4, 1, 0, 4, 0, 1)
C) (-1.35, 0.55, -0.8, -1.45, 1.1, 0.2, 0.1, 1.65) on (0.35, 1.45, -0.2, 1.45, 0.9, -0.2, 0.9, 0.35)

Question #82 of 105 Question ID: 1472206

Alexis Popov, CFA, has estimated the following specification: xt = b0 + b1 × xt-1 + et. Which of
the following would most likely lead Popov to want to change the model's specification?

A) b0 < 0.

B) Correlation(et, et-1) is not significantly different from zero.

C) Correlation(et, et-2) is significantly different from zero.

Clara Holmes, CFA, is attempting to model the importation of an herbal tea into the United
States which last year was $54 million. She gathers 24 years of annual data, which is in
millions of inflation-adjusted dollars.

She computes the following equation:

(Tea Imports)t = 3.8836 + 0.9288 × (Tea Imports)t − 1 + et

t-statistics (0.9328) (9.0025)

R2 = 0.7942

Adj. R2 = 0.7844

SE = 3.0892

N = 23

Holmes and her colleague, John Briars, CFA, discuss the implication of the model and how
they might improve it. Holmes is fairly satisfied with the results because, as she says "the
model explains 78.44 percent of the variation in the dependent variable." Briars says the
model actually explains more than that.

Briars and Holmes decide to ask their company's statistician about the consequences of
serial correlation. Based on what Briars and Holmes tell the statistician, the statistician
informs them that serial correlation will only affect the standard errors and the coefficients
are still unbiased. The statistician suggests that they employ the Hansen method, which
corrects the standard errors for both serial correlation and heteroskedasticity.

Given the information from the statistician, Briars and Holmes decide to use the estimated
coefficients to make some inferences. Holmes says the results do not look good for the
future of tea imports because the coefficient on (Tea Import)t − 1 is less than one. This means
the process is mean reverting. Using the coefficients in the output, says Holmes, "we know
that whenever tea imports are higher than 41.810, the next year they will tend to fall.
Whenever the tea imports are less than 41.810, then they will tend to rise in the following
year." Briars agrees with the general assertion that the results suggest that imports will not
grow in the long run and tend to revert to a long-run mean, but he says the actual long-run
mean is 54.545. Briars then computes the forecast of imports three years into the future.

Question #83 - 86 of 105 Question ID: 1472096

With respect to the statement that the company's statistician made concerning the
consequences of serial correlation, assuming the company's statistician is competent, we
would most likely deduce that Holmes and Briars did not tell the statistician:

A) the sample size.

B) the model’s specification.
C) the value of the Durbin-Watson statistic.

Question #84 - 86 of 105 Question ID: 1472097

The statistician's statement concerning the benefits of the Hansen method is:

correct, because the Hansen method adjusts for problems associated with both
A)
serial correlation and heteroskedasticity.
not correct, because the Hansen method only adjusts for problems associated with
B)
serial correlation but not heteroskedasticity.
not correct, because the Hansen method only adjusts for problems associated with
C)
heteroskedasticity but not serial correlation.

Question #85 - 86 of 105 Question ID: 1472098

Using the model's results, Briar's forecast for three years into the future is:

A) $47.151 million.
B) $54.543 million.
C) $54.108 million.

Question #86 - 86 of 105 Question ID: 1472099

With respect to the comments of Holmes and Briars concerning the mean reversion of the
import data, the long-run mean value that:

A) Briars computes is correct.

B) Briars computes is not correct, and his conclusion is probably not accurate.
C) Briars computes is not correct, but his conclusion is probably accurate.

Winston Collier, CFA, has been asked by his supervisor to develop a model for predicting the
warranty expense incurred by Premier Snowplow Manufacturing Company in servicing its
plows. Three years ago, major design changes were made on newly manufactured plows in
an effort to reduce warranty expense. Premier warrants its snowplows for 4 years or 18,000
miles, whichever comes first. Warranty expense is higher in winter months, but some of
Premier's customers defer maintenance issues that are not essential to keeping the
machines functioning to spring or summer seasons. The data that Collier will analyze is in
the following table (in $ millions):

Seasonal Lagged
Change in Lagged Change in
Warranty Change in
Quarter Warranty Warranty
Expense Warranty
Expense yt Expense yt-1
Expense yt-4

2002.1 103

2002.2 52 –51

2002.3 32 –20 –51

2002.4 68 +36 –20

2003.1 91 +23 +36

2003.2 44 –47 +23 –51

2003.3 30 –14 –47 –20

2003.4 60 +30 –14 +36

2004.1 77 +17 +30 +23

2004.2 38 –39 +17 –47

2004.3 29 –9 –39 –14

2004.4 53 +24 –9 +30

Winston submits the following results to his supervisor. The first is the estimation of a trend
model for the period 2002:1 to 2004:4. The model is below. The standard errors are in
parentheses.

(Warranty expense)t = 74.1 - 2.7* t + et

 (14.37) (1.97)

R-squared = 16.2%

Winston also submits the following results for an autoregressive model on the differences in
the expense over the period 2004:to 2004:4. The model is below where "y" represents the
change in expense as defined in the table above. The standard errors are in parentheses.

yt = -0.7 - 0.07* yt-1 + 0.83* yt-4 + et

(0.643) (0.0222) (0.0186)

R-squared = 99.98%

After receiving the output, Collier's supervisor asks him to compute moving averages of the
sales data.

Question #87 - 90 of 105 Question ID: 1472158

Collier's supervisors would probably not want to use the results from the trend model for all
of the following reasons EXCEPT:

A) the model is a linear trend model and log-linear models are always superior.
B) the slope coefficient is not significant.
it does not give insights into the underlying dynamics of the movement of the
C)
dependent variable.

Question #88 - 90 of 105 Question ID: 1472159

For this question only, assume that Winston also ran an AR(1) model with the following
results:

yt = −0.9 − 0.23* yt −1 + et

R-squared = 78.3%

(0.823) (0.0222)

The mean reverting level of this model is closest to:

A) 1.16.
B) −0.73.
C) 0.77.

Question #89 - 90 of 105 Question ID: 1472160

Based on the autoregressive model, expected warranty expense in the first quarter of 2005
will be closest to:

A) $51 million.
B) $60 million.
C) $65 million.

Question #90 - 90 of 105 Question ID: 1472161

Based on the results, is there a seasonality component in the data?

A) Yes, because the coefficient on yt–4 is large compared to its standard error.

B) Yes, because the coefficient on yt is small compared to its standard error.

C) No, because the slope coefficients in the autoregressive model have opposite signs.

Question #91 of 105 Question ID: 1472153

A time series that has a unit root can be transformed into a time series without a unit root
through:

A) mean reversion.
B) first differencing.
C) calculating moving average of the residuals.

Question #92 of 105 Question ID: 1472137

A monthly time series of changes in maintenance expenses (ΔExp) for an equipment rental
company was fit to an AR(1) model over 100 months. The results of the regression and the
first twelve lagged residual autocorrelations are shown in the tables below. Based on the
information in these tables, does the model appear to be appropriately specified? (Assume a
5% level of significance.)

Regression Results for Maintenance Expense Changes

Model: DExpt = b0 + b1DExpt–1 + et

Coefficients Standard Error t-Statistic p-value

Intercept 1.3304 0.0089 112.2849 < 0.0001

Lag-1 0.1817 0.0061 30.0125 < 0.0001

Lagged Residual Autocorrelations for Maintenance Expense Changes

Lag Autocorrelation t-Statistic Lag Autocorrelation t-Statistic

1 −0.239 −2.39 7 −0.018 −0.18

2 −0.278 −2.78 8 −0.033 −0.33

3 −0.045 −0.45 9 0.261 2.61

4 −0.033 −0.33 10 −0.060 −0.60

5 −0.180 −1.80 11 0.212 2.12

6 −0.110 −1.10 12 0.022 0.22

A) Yes, because most of the residual autocorrelations are negative.

B) Yes, because the intercept and the lag coefficient are significant.
C) No, because several of the residual autocorrelations are significant.

Question #93 of 105 Question ID: 1472203

Consider the following estimated model:

(Salest - Sales t-1)= 100 - 1.5 (Sales t-1 - Sales t-2) + 1.2 (Sales t-4 - Sales t-5) t=1,2,.. T

and Sales for the periods 1999.1 through 2000.2:

t Period Sales

T 2000.2 $1,000

T-1 2000.1 $900

T-2 1999.4 $1,200

T-3 1999.3 $1,400

T-4 1999.2 $1,000

T-5 1999.1 $800

The forecasted Sales amount for 2000.3 is closest to:

A) $1,730.00
B) $730.00
C) $1,430.00

Bert Smithers, CFA, is a sell-side analyst who has been asked to look at the luxury car sector.
He has hypothesized that sales of luxury cars have grown at a constant rate over the past 15
years.

Exhibit 1

b0 0.4563

b1 0.6874

Standard error 0.3745

R-squared 0.7548

Durbin-Watson 1.23
F 12.63

Observations 15

20X1 sales ($bn) 1.05

Question #94 - 99 of 105 Question ID: 1472172

If his assumption about a constant is correct, which of the following models is most
appropriate for modeling these data?

A) ln(LuxCarSales) = b0 + b1(t) + et.

B) LuxCarSalest = b0 + b1LuxCarSales(t-1) + et.

C) LuxCarSales = b0 + b1(t) + et.

Question #95 - 99 of 105 Question ID: 1472173

After discussing the above matter with a colleague, Bert finally decides to use an annual
autoregressive model of Order One [i.e., AR(1)]. Using the data in Exhibit 1, calculate the
mean reverting level of the series.

A) 1.66.
B) 1.26.
C) 1.46.

Question #96 - 99 of 105 Question ID: 1472174

Bert is aware that the Dickey Fuller test can be used to discover whether a model has a unit
root. He is also aware that the test would use a revised set of critical t-values. What would it
mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0)?

A) There is a unit root but the model can be used if covariance-stationary.

B) There is a unit root and the model cannot be used in its current form.
C) There is no unit root.

Question #97 - 99 of 105 Question ID: 1472175

Bert would also like to test for serial correlation in his AR(1) model. How could this be done?

A) use the provided Durbin-Watson statistic and compare it to a critical value.

determine if the series has a finite and constant covariance between leading and
B)
lagged terms of itself.
C) use a t-test on the residual autocorrelations over several lags.

Question #98 - 99 of 105 Question ID: 1472176

When using the root mean squared error (RMSE) criterion to evaluate the predictive power
of the model, which of the following is the most appropriate statement?

A) Use the model with the highest RMSE calculated using the in-sample data.
B) Use the model with the lowest RMSE calculated using the in-sample data.
C) Use the model with the lowest RMSE calculated using the out-of-sample data.

Question #99 - 99 of 105 Question ID: 1472177

Bert would like to use his AR(1) model to forecast future sales of luxury automobiles. What is
the annualized growth rate between today and 20X3?

A) 12%.
B) 10%.
C) 11%.
Diem Le is analyzing the financial statements of McDowell Manufacturing. He has modeled
the time series of McDowell's gross margin over the last 16 years. The output is shown
below. Assume 5% significance level for all statistical tests.

Autoregressive Model

Gross Margin – McDowell Manufacturing

Quarterly Data: 1st Quarter 1985 to 4th Quarter 2000

Regression Statistics

R-squared 0.767

Standard error of forecast 0.049

Observations 64

Durbin-Watson 1.923 (not statistically significant)

Coefficient Standard Error t-statistic

Constant 0.155 0.052 ?????

Lag 1 0.240 0.031 ?????

Lag 4 0.168 0.038 ?????

Autocorrelation of Residuals

Lag Autocorrelation Standard Error t-statistic

1 0.015 0.129 ?????

2 –0.101 0.129 ?????

3 –0.007 0.129 ?????

4 0.095 0.129 ?????

Partial List of Recent Observations

Quarter Observation

4th Quarter 2002 0.250

1st Quarter 2003 0.260

2nd Quarter 2003 0.220

3rd Quarter 2003 0.200

 4th Quarter 2003 0.240

Abbreviated Table of the Student's t-distribution (One-Tailed Probabilities)

df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005

50 1.299 1.676 2.009 2.403 2.678

60 1.296 1.671 2.000 2.390 2.660

70 1.294 1.667 1.994 2.381 2.648

Question #100 - 103 of 105 Question ID: 1472122

Le can conclude that the model is:

A) properly specified because the Durbin-Watson statistic is not significant.

B) properly specified because there is no evidence of autocorrelation in the residuals.
not properly specified because there is evidence of autocorrelation in the residuals
C)
and the Durbin-Watson statistic is not significant.

Question #101 - 103 of 105 Question ID: 1472123

What is the forecast for the gross margin in the first quarter of 2004?

A) 0.246.
B) 0.250.
C) 0.256.

Question #102 - 103 of 105 Question ID: 1472124

With respect to heteroskedasticity in the model, we can definitively say:

A) nothing.
an ARCH process exists because the autocorrelation coefficients of the residuals
B)
have different signs.
C) heteroskedasticity is not a problem because the DW statistic is not significant.

Question #103 - 103 of 105 Question ID: 1472125

Supposing the time series is actually a random walk, which of the following approaches
would be appropriate prior to using an autoregressive model?

A) First differencing the time series.

B) ARCH.
C) Convert the time series by taking a natural log of the series.

Question #104 of 105 Question ID: 1472201

One choice a researcher can use to test for nonstationarity is to use a:

A) Breusch-Pagan test, which uses a modified t-statistic.

B) Dickey-Fuller test, which uses a modified χ2 statistic.

C) Dickey-Fuller test, which uses a modified t-statistic.

Question #105 of 105 Question ID: 1472150

Which of the following statements regarding time series analysis is least accurate?

If a time series is a random walk, first differencing will result in covariance

A)
stationarity.
An autoregressive model with two lags is equivalent to a moving-average model with
B)
two lags.
C) We cannot use an AR(1) model on a time series that consists of a random walk.