In a recent analysis, a financial analyst is evaluating a stock that has shown substantial growth over the last five years. The analyst employs a simple linear trend model to forecast future prices based on historical data. A linear trend can be expressed as: $$ Y_t = a + bt $$ where: $Y_t$ = dependent variable (stock price) $a$ = y-intercept (initial value at $t=0$) $b$ = slope of the line (rate of change per unit of time) $t$ = independent variable (time period) Which of the following statements about the linear trend model is true?

Exam

CFA Level 2

Section

Difficulty

Quantitative Methods

Understanding Linear Trend Models

Easy Time-series Analysis Trend Models

In a recent analysis, a financial analyst is evaluating a stock that has shown substantial growth over the last five years. The analyst employs a simple linear trend model to forecast future prices based on historical data. A linear trend can be expressed as:

$$ Y_t = a + bt $$

where:

$Y_t$ = dependent variable (stock price)
$a$ = y-intercept (initial value at $t=0$)
$b$ = slope of the line (rate of change per unit of time)
$t$ = independent variable (time period)

Which of the following statements about the linear trend model is true?

The slope $b$ indicates whether the prices are increasing or decreasing over time.

The intercept $a$ represents the expected stock price at year 5.

A linear trend model implies prices will always increase without limits.

Hint

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