Below is the question ID 1208507, how are we supposed to know that the growth rate is compounded, covariance stationary or that the mean is constant? I know they are the number one book seller but I don’t think that means their growth rate is growing at a compounded rate.
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. 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:
log-linear model to analyze the data because it is likely to exhibit a compound growth trend.
mean-reverting model to analyze the data because the time series pattern is covariance stationary.
linear model to analyze the data because the mean appears to be constant.
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.