Question #43
Reading: Reading 2 Time-Series Analysis
PDF File: Reading 2 Time-Series Analysis.pdf
Page: 20
Status: Unattempted
Part of Context Group: Q42-43
Shared Context
Question
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:
Answer Choices:
A. Incorrectly specified and first differencing the data would be an appropriate remedy
B. Correctly specified
C. Incorrectly specified and first differencing the natural log of the data would be an appropriate remedy
Explanation
If constant growth rate is an appropriate model for Car-tel, its dividends (as well as
earnings and revenues) will grow at a constant rate. In such a case, the time series needs
to be adjusted by taking the natural log of the time series. Taking the natural log of the
time series would lead to a series that exhibits a constant amount of growth (and still not
stationary). The final step would be to first difference the transformed series to make it
covariance stationary. First differencing would remove the trending component of a
covariance non-stationary time series but would not be appropriate for transforming an
exponentially growing time series.
(Module 2.1, LOS 2.a)
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
In Sales
Seasonal Lagged
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