Question #20
Reading: Reading 2 Time-Series Analysis
PDF File: Reading 2 Time-Series Analysis.pdf
Page: 9
Status: Unattempted
Correct Answer: B
Question
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:
Answer Choices:
A. mean-reverting model to analyze the data because the time series pattern is covariance stationary
B. linear model to analyze the data because the mean appears to be constant
C. log-linear model to analyze the data because it is likely to exhibit a compound growth trend
Explanation
A log-linear model is more appropriate when analyzing data that is growing at a compound
rate. Sales are a classic example of a type of data series that normally exhibits compound
growth.