# Quant QBank question

Is the time series of WPM covariance stationary? A) Yes, because the computed t-statistic for a slope of 1 is not significant. B) Yes, because the computed t-statistic for a slope of 1 is significant. C) No, because the computed t-statistic for a slope of 1 is not significant. D) No, because the computed t-statistic for a slope of 1 is significant.

B.

Gotta be B

after further review, shouldn’t it be d? sorry i’m not in study mode right now, got back from a round of golf and now i’m sleepy and lazy.

sorry guys. i’m unable to put the whole table for this question but…Your answer: D was incorrect. The correct answer was C) No, because the computed t-statistic for a slope of 1 is not significant. The t-statistic for the test of the slope equal to 1 is computed by subtracting 1.0 from the coefficient, 1.3759 [= (1.0926 − 1.0) / 0.0673], which is not significant at the 5% level. The time series has a unit root and is not covariance stationary. —my question is if the slope of 1 is not significant, how come it’s not covariance stationary?

If its not significantly different from 1, it has a unit root and is not covariance stationary.

a time series must have a finite mean-reverting level to be covariance stationary. if b1 = 1, it’s not covariance stationary. so if b1 <> 1, it’s also not convariance stationary?

sorry guys, im so confused about the concept of convariance stationary…need some help here.

If b1 = 1 you have a unit root and the regression is not covariance stationary. To test if there is a unit root, you want to subtract one from b1 and divide it by its standard error to see if b1 is significantly different from 1. Since the test concluded that b1 is not significantly different from one, you have a unit root and therefore the regression is not covariance stationary.

Duh… I got this wrong. And I was already done with my final review for Quant :-(((( But my understanding is… H0: b1 = 1 Ha: b1 != 1 if(t(stat) > t(critical)) { - Reject: NULL - Conclude: slope not significant to 1 - Result: Series does not have a UNIT ROOT and hence is covariance stationary } For this particular example: “The computed t-statistic is not significant” So, not significant to 1 means. It is 1 (not really but yea, just for the understanding purpose). It is 1 means. It has UNIT root. It has UNIT root means, It is non-covariance stationary… So yes, C should be correct.