FERRER
MSEM
Forecasting
PROBLEMS
P1. The data below consist of the closing price of the common stock of the American Telephone and
Telegraph Corporation on 10 recent trading days.
Time(t) Price Time(t) Price
1 $24.10 6 $22.73
2 23.80 7 22.60
3 23.39 8 21.76
4 22.90 9 22.14
5 22.10 10 21.69
a. Using a five-period moving average, forecast the price of the stock for period 10.
T5-9 = (22.10 + 22.73+22.60+21.76+22.14)/5 = 22.27
c. Using a five-period moving average, forecast the price of the stock for period 11.
T6-10 = (22.73+22.60+21.76+22.14+21.69)/5 = 22.187
P2. A product is manufactured in distinct batches of various sizes. The cost accountant wished to
obtain an equation to use for estimating the cost of a batch. He obtained data on a number of
batches, consisting of the size of the batch, measured in number of pieces, and the total cost of the
batch, consisting of the setup cost and the variable costs of labor, material, etc. Costs are stated in
thousands of dollars.
Size of Cost of
Batch Batch
20 $1.4
30 3.4
40 4.1
50 3.8
70 6.7
80 6.6
100 7.8
120 10.4
150 11.7
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Forecasting
b. Draw the scatterplot of this data. Does a straight line look like a reasonable fit?
The given data has a reasonable fit in a straight line pattern, and it shows the relationship
between the x and y axis. When the size of batch increases it also increases the cost of
batches.
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CYNTHIA M. FERRER
MSEM
Forecasting
d. What is the value of the slope of the regression line that best fits this data?
Y = a + bx
b = ∑xy – n xy a=y -bx
2 2
∑x – nx
Y = 0.59 + 0.08x
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Forecasting
i. What is the value of the coefficient of correlation? Does it appear to indicate a high degree of
association between the size of the batch and the cost?
Coefficient of correlation:
b = n∑xy - ∑x∑y
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CYNTHIA M. FERRER
MSEM
Forecasting
P3. The president of the Rich and Greene College of Business Administration wishes to forecast the
enrollment for next fall. The enrollment is measured in Full Time Equivalents (FTE), which
represent the number of full-time students, which is equivalent to the existing mixture of full-time
and part-time students. Data representing the fall enrollment for the past ten years is given
below:
time(t) Enrollmen
t
1 907
2 981
3 1014
4 1015
5 1050
6 1071
7 1123
8 1118
9 1175
10 1216
a. Draw a scatterplot. Does the data appear to contain a linear trend?
The scatterplot shows a positive, linear trend between the number of student enrolled and the
number of years.
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Forecasting
Y = 900.20 + 30.33x
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CYNTHIA M. FERRER
MSEM
Forecasting
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Forecasting
P4. The table below contains data on the monthly amount, in millions of dollars, which was spent by
"leading national advertisers" for advertising apparel and accessories in magazines, in four recent
years.
Year
Month 1 2 3 4
January $6.7 $7.9 $ 8.8 $ 7.4
February 6.2 8.4 10.3 17.4
March 12.1 15.1 20.4 26.1
April 14.4 15.9 17.3 26.6
May 11.1 11.8 15.7 17.0
June 7.4 5.5 9.0 10.4
July 6.4 7.6 8.9 7.9
August 12.9 13.0 20.0 24.7
September 21.1 23.2 32.6 35.6
October 15.4 17.2 24.2 24.8
November 16.5 16.7 22.0 22.2
December 11.6 11.9 16.9 19.8
Source: Survey of Current Business, U.S. Department of Commerce, Washington, D.C., various dates.
P5. Use the data in Problem P4 to create the following two naïve forecasts:
a. Use the actual value in the previous period to forecast the amount which will be spent on
advertising apparel and accessories in January of Year 5.
The actual spent in January of Year 5 is 19.8 using naïve forecasting the actual spent on
last December of year value. (See attached Excel for reference)
b. Use the actual value in the same month of the previous year to forecast the amount which will
be spent on advertising apparel and accessories for January of Year 5.
The actual spent for January of Year 5 is 19.8 using naïve forecasting the actual spent on
last December of year value. (See attached Excel for reference)
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CYNTHIA M. FERRER
MSEM
Forecasting
Ft = Ժ (At - 1) + (1 - Ժ ) Ft-1
Ժ = 0.20
Initial Forecast = 6.7
b. Draw the graph of the actual values and the forecasted values.
The comparison data between actual and forecast values at in smooth curve lines, but there
are increase of actual values versus forecast values to month of April and September. There is
a drop of actual values from the line of forecast values to month of June to July.
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Forecasting
2. Remember: Error is actual minus forecast. Forecast error is a standard formula and a simple one:
simply remember that error is the actual observed in a period minus the forecast for the same period. If
you scan your work for Problem P6, you may see why this formula is somewhat “counter-intuitive”, and
thus there is the danger of confusion if you do not stay focused. Notice that, when a forecast is too high
compared to its corresponding actual, such as during July in Problem P6, the error associated with that
forecast is negative. When the forecast too low, such as in September, the error is positive. Because a
forecast that is too high in hindsight implies optimism and surplus, and a forecast revealed as too low
suggests there was a shortage, people sometimes accidentally associate the opposite signs to the forecast
errors. However, this simply isn’t true: error is actual minus forecast.
3. Tips for “Real Life” forecasting. Test problems and end-of-chapter problems are usually specific in
terms of which technique you should employ. However, in “real life”, how should you determine which
time series technique would be appropriate for your forecasting? Begin by plotting your past data, and
studying it. Does the plot reveal a trend? If so, either a trend line or trend-adjusted exponential
smoothing should be used. A linear trend line requires less effort than trend-adjusted smoothing. If no
trend is present, select one of the averaging techniques, such as moving average or exponential
smoothing. Whether trend or averaging is used, you may also want to consider whether seasonal
variations are a factor. Again, examine the plot to determine if major ups and downs occur periodically.
Note that when annual data are plotted, seasonality cannot be discerned because these values have been
aggregated into annual amounts, thereby concealing any possible seasonal variation.
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