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      Question

      The equation of a random walk model WITHOUT drift is

      best represented as:
      A Yₜ = μ + Yₜ₋₁ + εₜ, where μ ≠ 0 is the drift term and εₜ ~ WN(0, σ²) Correct Answer Incorrect Answer
      B Yₜ = Yₜ₋₁ + εₜ, where εₜ ~ WN(0, σ²); the process has no deterministic trend and has a unit root Correct Answer Incorrect Answer
      C Yₜ = α + βt + εₜ, where the trend is deterministic and the process is stationary around it Correct Answer Incorrect Answer
      D Yₜ = ρYₜ₋₁ + εₜ, where |ρ| < 1, making the process mean-reverting and stationary Correct Answer Incorrect Answer

      Solution

      Option (A) = random walk WITH drift. Option (C) = trend-stationary (TS) process — fundamentally different from a unit root (DS) process. Option (D) = stationary AR(1).

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