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

A)   most financial and time series have a natural tendency to revert toward their means.

B)   serial correlation, a contributing factor to nonstationarity, is always present to a certain degree in most financial and time series.

C)   the root mean squared error (RMSE) is always going to be a positive number.

D)   most financial and economic relationships are dynamic and the estimated regression coefficients can vary greatly between periods.

The correct answer was D)

Because all financial and time series relationships are dynamic, regression coefficients can vary widely from period to period. Therefore, financial and time series will always exhibit some amount of instability or nonstationarity.

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

A)   longer time series are usually more stable than those with shorter time series.

B)   a fewer number of independent variables are usually more stable than those with a greater number.

C)   a greater number of independent variables are usually more stable than those with a smaller number.

D)   shorter time series are usually more stable than those with longer time series.

The correct answer was D)

Those models with a shorter time series are usually more stable because there is less opportunity for variance in the estimated regression coefficients between the different time periods.

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

A)   The length of the sample time period.

B)   Current underlying economic and market conditions.

C)   The total number of observations.

D)   The root mean squared error (RMSE) of the model.

The correct answer was B)

There will always be a tradeoff between the increase statistical reliability of a longer time period and the increased stability of estimated regression coefficients with shorter time periods. Therefore, the underlying economic environment should be the deciding factor when selecting a time series sample period.