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yields with the smallest Error than 4, 5, or more periods. It just shows that the more
periods you use in moving average, the smoother your time series is.
It is shown in the table above the Error measures and the forecast for the next
period. Based on the results, forecast for the next period is 0.38. Therefore, Honeyed
Trader should close the company because it is already below their breakeven.
2. If Tim, one of the Financial Management graduate used the weighted moving
average, do you think there is a difference? Is there any difference between the
three or four weighted average?
Table 2. Forecasting Results using Weighted Moving Average with 3 & 4 periods
Value
Measure
3 period 4 periods
Error Measures
Bias (Mean Error) -0.005 -0.007
MAD (Mean Absolute Deviation) 0.014 0.015
MSE (Mean Squared Error) 0.001 0.001
Standard Error (denom=n-2=115) 0.027 0.029
MAPE (Mean Absolute Percent Error) 3.02% 3.33%
Forecast
next period 0.385 0.385
Table 2 shows the Forecasting Results using the weighted moving average with
3 and 4 periods. Based on the table presented above, period 3 and 4 has the same
forecast which is 0.385 or 0.39, however, diagnostics in the error is different between
the 3 and 4 periods. Three (3) periods has a smallest MAD, Standard error and MAPE
compared to four (4) periods as shown in Table 2. Thus, it is better to use the 3 period
than 4 periods because the lower the error the better the forecast is.
On the other hand, based on the results in the forecast, it is shown that there is
a 0.39 forecast next month. Thus, it is quite better not to close the business because
3. Eventually, they hired a consultant, Brad, who gave a forecast based on the
exponential smoothing techniques. He submitted two forecast with 0.2 and 0.8
alphas. Which forecast will you recommend? Why?
Table 3. Forecasting Results using exponential smoothing technique @ 0.2 and 0.8
Value
Measure
0.2 0.8
Error Measures
Bias (Mean Error) -0.015 -0.004
MAD (Mean Absolute Deviation) 0.024 0.012
MSE (Mean Squared Error) 0.002 0.001
Standard Error (denom=n-2=117) 0.041 0.023
MAPE (Mean Absolute Percent Error) 5.20% 2.59%
Forecast
next period 0.378 0.388
and 0.8 alphas. If α is small (close to 0), more weight is given to observations from
the more distant past and if α is large (close to 1), more weight is given to the more
recent observations.
Based on the results presented in table 3, next period’s forecast for alpha
0.2 and 0.8 were 0.378 or 0.38 and 0.388 or 0.39 respectively. Results shows that
it is better to use the alpha of 0.8 because it yields with a smallest measurement
error than 0.2. It just shows that the larger the α the greater the adjustment that
takes place in the next forecast in the direction of the previous data point;
forecasts is smoother. With that, it is better to used larger α because it will give a
alpha of 0.8 it will lead to a 0.39 forecast for the next period. Thus, it is quite better
Trend-adjusted
Measure Simple Exponential
Exponential
Smoothing
Smoothing
0.2 0.8 ɑ=0.5 and β=0.3
Error Measures
Bias (Mean Error) -0.015 -0.004 0
MAD (Mean Absolute Deviation) 0.024 0.012 0.016
MSE (Mean Squared Error) 0.002 0.001 0.001
Standard Error (denom=n-2=117) 0.041 0.023 0.029
MAPE (Mean Absolute Percent Error) 5.20% 2.59% 3.51%
Forecast
next period 0.378 0.388 0.392
Table 4 shows the difference between the simple exponential smoothing and
use simple exponential smoothing with an alpha of 0.8 rather than trend-adjusted
exponential smoothing with an alpha of 0.5 and a Beta of 0.3. Results shows that the
forecast for the next period in simple exponential smoothing with an alpha of 0.8 and
trend-adjusted exponential smoothing has the same forecast for the next period with
alpha of 0.8 yields a smallest error than trend-adjusted exponential smoothing. Thus,
the claim of Bob that trend-adjusted exponential smoothing with a 0.5 alpha and 0.3
betas were not the best method in forecasting the price of sugar.
On the other hand, the reason for this is that the alpha is greater than the beta,
it gives less weight to the most recent trends and tends to smooth out the present
trend. Therefore, higher beta emphasizing a more responsive trend than to a lower
Beta.
0.8 and trend-adjusted exponential smoothing with an alpha of 0.5 and beta 0.3
because both method yields with a forecast of 0.39 which is above their breakeven.
5. “All the forecast is static,” claimed Kim a former employee. It is better to forecast
with a model using linear or multiple regression. He presented a linear model and
multiple regression models. Is his model better?
Table 5.1 is the table summary. This table provides the multiple R, R
Square, Adjusted R square, standard error and the total number of observation.
price. A value of 0.62, indicates that the sugar price prediction is at good level. The
R Square, which is the proportion of the variance in the sugar price that can be
index. It is presented in table 5.1 the value of 0.39 that phosphate and commodity
food price index explain 39% variability of the sugar price. In addition, there is a
The F ratio test whether the overall regression model is a good fit for the
data. The table shows that the Phosphate and Commodity food price index
statistically significantly predict the sugar price, F(2,95) = 36.77, p < 4.07567E-
13.
95% Confidence
Standard Level
Coefficients t Stat P-value
Error
Lower Upper
Bound Bound
Intercept 0.116189 0.054864 2.117774 0.036311 0.007534 0.224844
Phosphate 0.000346 0.000049 7.061131 0.000000 0.000249 0.000443
Commodity
food price
index 0.001904 0.000515 3.697239 0.000333 0.000884 0.002924
commodity food price index. As shown in table 5.3, we consider the effect of
phosphate. The coefficient equal to 0.000346, this means that for each one-month
the commodity food price index, the coefficient is equal to 0.001904, thus for one-
In addition, phosphate and commodity food price index are below 0.05
On the other hand, the claim of Kim that linear/multiple regression is better
than to the other methods presented were not true because regression was just
assessing if phosphate and commodity food price index significantly affect the
price of sugar. It shows relationship between independent and dependent
variables. After trying different forecasting methods, Honeyed Trader should close
the business because most of the forecast results were below their breakeven.