A Quantitative Analysis Problem Set

QSO 510: Module 6

Notes: Before doing this assignment, do the practice problem posted under Apply and Discover. Word-process your answers within this document. Do not create a new file. Show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit.

Problem 1

The U.S. Census Bureau publishes data on factory orders for all manufacturing, durable goods, and nondurable goods industries. Shown here are factory orders in the United States from 1987 through 1999 ($ billion).

a) Use these data to develop forecasts for the years 1992 through 1999 using a 5-year moving average.

Please see the full answers in the table below. This will explain how I arrived at my answers:

Simple Moving Average (SMA) using previous 5 years… Y = year. The higher the number, the more recent the year... Y5 would be the most recent year; Y1 would be the most distant).

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This is then repeated for each subsequent year and using the preceding 5 years.

b) Use these data to develop forecasts for the years 1992 through 1999 using a 5-year weighted moving average. Weight the most recent year by 6, the previous year by 4, the year before that by 2, and the other years by 1.

Please see the full answers in the table below. This will explain how I arrived at my answers:

Weighted Moving Average (WMA) using previous 5 years… Y = year. The calculation is similar to the simple moving average. However, certain values have to be multiplied by their respective weight. Additionally, the denominator should take this into account. For this question, instead of dividing by 5, we will divide by 14 (6+4+2+1+1 = 14).

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This is then repeated for each subsequent year and using the preceding 5 years.

PROBLEM 1 CONTINUED…

c) Which method is more suitable for forecasting factory orders? Hint: Compare the two methods based on Mean Absolute Deviation (MAD)?[pic]

A, B and C are answered here… For this...