Forecasting

1. Moving averages are often used to identify movements in stock prices. Daily closing
prices (in dollars per share) for IBM for August 24, 2005, through September 16,
2005, follow (Compustat, February 26, 2006).
Day Price ($) Day Price $
August 24 81.32 September 7 80.98
August 25 81.10 September 8 80.80
August 26 80.38 September 9 81.44
August 29 81.34 September 12 81.48
August 30 80.54 September 13 80.75
August 31 80.62 September 14 80.48
September 1 79.54 September 15 80.01
September 2 79.46 September 16 80.33
September 6 81.02

a. Use a three-days moving average to smooth the time series. Forecasting the closing
price for the next trading day.
b. Use exponential smoothing with a smoothing constant of α = 0.6 to smooth the time
series. Forecast the closing price for the next trading day.
c. Which of the two methods do you prefer? Why?

2. The following data represent 15 quarters of manufacturing capacity utilization (in

percentages).
Quarter/Year Utilization Quarter/Year Utilization
1/2004 82.5 1/2006 78.8
2/2004 81.3 2/2006 78.7
3/2004 81.3 3/2006 78.4
4/2004 79.0 4/2006 80.0
1/2005 76.6 1/2007 80.7
2/2005 78.0 2/2007 80.7
3/2005 78.4 3/2007 80.8
4/2005 78.0

a. Compute three – and four quarter moving averages for this time series. Which moving
average provides the better forecast?
b. Use smoothing constants of α = 0.4 and α = 0.5 to develop forecasts for the fourth
quarter of 2007. Which smoothing constant provides the better forecast?
c. Based on the analyses in parts (a) and (b), which method – moving averages or
exponential smoothing – provides the better forecast? Explain.
3. The following table reports the percentage of stocks in a typical portfolio in nine
quarters from 2005 to 2007.
Quarter Stock % Quarter Stock %
1st -2005 29.8 2nd – 2006 31.5
2nd – 2005 31.0 3rd – 2006 32.0
3rd – 2005 29.9 4th – 2006 31.9
4th – 2005 30.1 1st - 2007 30.0
1st - 2006 32.2

a. Use exponential smoothing to forecast this time series. Consider smoothing constants
of α = 0.2, 0.3, and 0.4. What value of the smoothing constant provides the best
forecast?
b. What is the forecast of the percentage of assets committed to stocks for the second
quarter of 2007?

4. The president of a small manufacturing firm has been concerned about the continual
growth in manufacturing costs over the past several years. The following is a series of
the cost per unit (in dollars) for the firm’s leading product over the past eight years.
Year Cost per unit ($) Year Cost per unit ($)
1 20.00 5 26.60
2 24.50 6 30.00
3 28.20 7 31.00
4 27.50 8 36.00

a. Graph this time series. Does a linear trend appear?

b. Develop the equation for the linear trend component for the time series. What is
the average cost increase per year? (Ans: Yt = 19.993+1.774t)

5. The following data show the average monthly cellular telephone bill (The New York
Times Almanc, 2006).

Year Amount
1998 39.43
1999 41.24
2000 45.27
2001 47.37
2002 48.40
2003 49.91
a. Graph this time series. Does a monthly trend appear to be present?
b. Develop a linear trend equation for this time series(Ans: Y= 37.67 + 2.17t).
c. Use the trend equation to estimate the average monthly bill for 2004 (Ans: 52.86).
d. Would you feel comfortable using the linear trend equation to make forecast for
several years into the future? Explain.

6. Hudson Marine has been an authorized dealer for C & D marine radios for the past
seven years. The number of radios sold each year is shown.

Year 1 2 3 4 5 6 7
Number sold 35 50 75 90 105 110 130

a. Graph this time series. Does a linear trend appear?

b. Develop the equation for the linear trend component for the time series. (Ans: Yt =
22.857+15.536t)
c. Use the linear trend developed in part (b) to prepare a forecast for sales in year 8.
(Ans: 147.15)

7. The quarterly sales data (number of copies sold) for a college textbook over the past
three years are as follows.

Quarter Year 1 Year 2 Year 3

1 1690 1800 1850
2 940 900 1100
3 2625 2900 2930
4 2500 2360 2615

a. Show the four quarter moving averages for this time series. Plot both the original time
series and the moving averages on the same graph.
b. Compute seasonal indexes for the four quarters. (Q1: 0.900, Q2: 0.486, Q3: 1.396,
Q4: 1.217)
c. When does the textbook publisher experience the largest seasonal index? Does this
result appear to be reasonable? Explain.
8. Suppose that the following are the quarterly sales data for the past seven years.

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total sales

1 6 15 10 4 35
2 10 18 15 7 50
3 14 26 23 12 75
4 19 28 25 18 90
5 22 34 28 21 105
6 24 36 30 20 110
7 28 40 35 27 130

a. Show the four quarter moving average values for this time series. Plot both the
original time series and the moving averages on the same graph.
b. Compute the seasonal indexes for the four quarters. (Ans: Q1: 0.899, Q2: 1.362, Q3:
1.118, Q4: 0.621)
c. When does Hudson Marine experience the largest seasonal effect? Does this result
seem reasonable? Explain.

9. Eddie’s Restaurants collected the following data on the relationship between

advertising and sales at a sample of five restaurants.

Advertising Expenditures ($1000s) 1.0 4.0 6.0 10.0 14.0

Sales ($1000s) 19.0 44.0 40.0 52.0 53.0

a. Let x represent advertising expenditures and y represents sales. Use the method of
least squares to develop a straight line approximation of the relationship between the
two variables. (Ans: y = 25.381 + 2.317x)
b. Use the equation developed in part (a) to forecast sales for an advertising expenditure
of $8000. (Ans: $43,917)

10. The supervisor of a manufacturing process believed that assembly –line speed (in
feet/minute) affected the number of defective parts found during on-line inspection.
To test this theory, management had the same batch of parts inspected visually at a
variety of line speeds. The following data were collected.

Number of defective parts

Line Speed found
20 21
20 19
40 15
30 16
60 14
40 17
a. Develop the estimated regression equation that relates line speed to the number of
defective parts found. (Ans: y = 22.173 – 0.1478x)
b. Use the equation developed in part (a) to forecast the number of defective parts found
for a line speed of 50 feet per minute. (Ans: 14.783  15)

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