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Forecasting
Forecasting is attempting to predict the future Decision makers want to reduce uncertainty by predicting future values such as sales or investment return
Steps in Forecasting
1. 2. 3. 4. 5. 6. 7. Determine the objective of the forecast Identify items to be forecast Determine time horizon Select the forecasting model(s) Gather data Validate model Make forecast and implement results
Types of Forecasts
1. Qualitative - subjective methods based on intuition and experience 2. Time Series based on historical data and assume the past indicates the future 3. Causal Models data based where there may be a cause and effect relation between variables
= A t - Ft
Time Series
A time series is where the same value is recorded at regular time intervals Examples: daily stock price, monthly sales, annual revenue, etc.
1. Multiplicative decomposition Forecast = Trend x Seasonality x Cycles x Random 2. Additive decomposition Forecast = Trend + Seasonality + Cycles + Random
Moving Averages
Smooth out variations in a time series when values are fairly steady Some number (k) of consecutive periods are averaged k-period moving average = (actual values in previous k periods) k
Exponential Smoothing
Another smoothing method Does not require extensive past data Ft+1 = Ft + x (At Ft) Ft+1 Ft At = forecast for period (t+1) = forecast for period t = a weight (smoothing constant) = actual value for period t
Trend Analysis
Fits a straight or curved line through a time series We will cover only linear trends A scatter diagram shows the trend Excel can both create the scatter diagram and fit the linear trend line
Go to file 11-5.xls
Seasonality Analysis
When a seasonal pattern repeats yearly, this can be used for future forecasts Need monthly or quarterly data A seasonal index is the ratio of the average value in that season, over the annual average
Steps Continued
2. Find the trend equation using the unseasonalized values 3. Calculate forecasts
Use the trend equation to make an unseasonalized forecast Multiply the unseasonalized forecast by the seasonal index
F-test is used
Multicollinearity
Why did home size become nonsignificant when land area was added? Multicollinearity exists when 2 or more independent variables are highly correlated Correlations among Xs can be used to detect multicollinearity