1. Prepare a forecast using the moving average technique. How robust is the forecast?

(MSE, MAD) Will Francisco close the business?

Table 1. Forecasting Results using Moving Average with 3 periods

Measure Value
Error Measures
Bias (Mean Error) -0.006
MAD (Mean Absolute Deviation) 0.016
MSE (Mean Squared Error) 0.001
Standard Error (denom=n-2=115) 0.03
MAPE (Mean Absolute Percent Error) 3.43%
Forecast
next period 0.383

Table 1 shows a 3-month moving average, 3 periods were used because it

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

it is above their breakeven.

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

Table 3 shows the Forecasting results using exponential smoothing at 0.2

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;

smaller α leads to less adjustment and so the series of one-step within-sample

forecasts is smoother. With that, it is better to used larger α because it will give a

more reliable forecast.

 On the other hand, if honeyed trader used the exponential smoothing at

alpha of 0.8 it will lead to a 0.39 forecast for the next period. Thus, it is quite better

not to close the business because it is above their breakeven.

4. However, another expert, Bob, submitted a trend-adjusted exponential smoothing

with a 0.5 alpha and 0.3 betas, with a strong opinion that this forecast is better than
the plain exponential smoothing. Do you agree?

Table 4. Forecasting Results using Simple and Trend-Adjusted Exponential Smoothing

Value

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

trend-adjusted exponential smoothing. Based on the results presented, it is better to

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

0.39. However, based on the measurement errors exponential smoothing with an

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.

In addition, it is better to use the simple exponential smoothing with an alpha of

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. Model Summary

Regression Statistics
Multiple R 0.62
R Square 0.39
Adjusted R Square 0.38
Standard Error 0.08
Observations 120

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.

The Multiple R is considered as one measure of quality of the prediction of sugar

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

explained by the independent variables- phosphate and commodity food price

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

0.38 or 38% accuracy of the data.

 Table 5.2. ANOVA
Significance
df SS MS F
F
Regression 2 0.47 0.24 36.77 4.07567E-13
Residual 117 0.75 0.01
Total 119 1.22

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.

Table 5.3 Coefficients

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

Coefficients indicate how much sugar price varies in Phosphate and

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

increase in phosphate, there is an increase in price of 0.000346. The same with

the commodity food price index, the coefficient is equal to 0.001904, thus for one-

month increase in commodity food price index, there is an increase of 0.001904.

In addition, phosphate and commodity food price index are below 0.05

significant variable, thus the independent variables- phosphate and commodity

food price index significantly affect the price of sugar.

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.