Question #98

Reading: Reading 2 Time-Series Analysis

PDF File: Reading 2 Time-Series Analysis.pdf

Page: 46

Status: Unattempted

Part of Context Group: Q97-98
Shared Context
- 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. B) determine if the series has a finite and constant covariance between leading and lagged terms of itself. C) use a t-test on the residual autocorrelations over several lags.
Question
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?
Answer Choices:
A. 11%
B. 12%
C. 10%
Explanation
To get the 20X2 value, plug today's value of 1.05 into the model: 0.4563 + 0.6874 × 1.05 = 1.18. Then use the result, 1.18, to forecast 20X3 as follows: 0.4563 + 0.6874 × 1.18 = 1.27. The annualized return between 20X1 and 20X3 is, therefore, (1.27 / 1.05)0.5 – 1 = 9.87%.
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