COF1STAT3386 ASSIGNMENT + SOLUTION

Question 1

1 points Save Given an actual demand of 61, a previous forecast of 58, and an > of .3, what would the forecast for the next period be using simple exponential smoothing? 45.5 57.1 58.9 61.0 65.5

Answer: 58.9 Explanation: The given information in the problem can be represented as follows The actual demand for the previous period = 61 Forecast for the previous period = 58 Smoothing constant = 0.3 The forecast for the next period is calculated using simple exponential smoothing is given by
Ft Ft 1 * ( At 1 Ft 1 )

Where Ft = forecast for period t Ft-1 = forecast for the previous period = 58 = smoothing constant = 0.3
At 1 = actual demand for the previous period = 61

The new forecast for the next period from the given information is given by

Ft Ft 1 * ( At 1 Ft 1 )

= 58 + 0.3 * (61 58) = 58.9 Hence the forecast for the next period is 58.9
Question 2 Which of the following values of alpha would cause exponential smoothing to respond the most slowly to forecast errors? 0.10 0.20 0.40 0.80 cannot be determined 1 points Save

Answer: 0.10 Explanation: The quickness of forecast adjustment to error is determined by the smoothing constant, . The closer its value is to zero, the slower the forecast will be to adjust to forecast errors. Thus the smoothing constant = 0.10 is the closest value to zero responds the most slowly to forecast errors. Hence the value of alpha is 0.10
Question 3 1 points Save A forecasting method has produced the following over the past five months. What is the mean absolute deviation?

> -0.2 -1.0

0.0 1.2 8.6

Answer: 1.2 Explanation: The mean absolute deviation (MAD) is given by MAD = Where e is the forecast error = Actualt Forecastt n = number of the month = 5 Using the given information in the above table, mean absolute deviation (MAD) is given by MAD =

e
n

e
n

1 2 2 0 1 5 6 5

= 1.2 Hence the mean absolute deviation is 1.2

Question 4 1 points Save Given forecast errors of -1, 4, 8, and -3, what is the mean absolute deviation? 2 3 4 8 16

Answer: 4 Explanation: The given information in the problem can be represented as follows The forecast errors are 1, 4, 8, 3 The mean absolute deviation (MAD) is given by MAD = Where e is the forecast error = Actualt Forecastt = 1, 4, 8, 3
e = 1, 4, 8, 3

e
n

n = number of the period = 4 Using the given information in the above table, mean absolute deviation (MAD) is given by MAD =

e
n

1 4 8 3 4 16 4

=4 Hence the mean absolute deviation is 4

Question 5 1 points Save The last four months of sales were 8, 10, 15, and 9 units. The last four forecasts were 5, 6, 11, and 12 units. The Mean Absolute Deviation (MAD) is 2 -10 3.5

9 10.5

Answer: 3.5 Explanation: The given information in the problem can be calculated as follows The calculation of the forecast error to find the mean absolute deviation (MAD) is given in the following table:

Period 1 2 3 4 TOTAL

Actual(sales) 8 10 15 9

Forecast 5 6 11 12

Error (A F) 3 4 4 3

Error 3 4 4 3 14

From the above table we calculate MAD, The mean absolute deviation (MAD) is given by MAD = Where e is the forecast error = Actualt Forecastt n = number of the month = 4 Using the given information in the above table, mean absolute deviation (MAD) is given by MAD =

e
n

e
n

14 4

= 3.5

Hence the mean absolute deviation is 3.5

Question 6

1 points Save A time series trend equation is 25.3 + 2.1 X. What is your forecast for period 7? 23.2 25.3 27.4 40.0 cannot be determined

Answer: 40.0 Explanation: A linear trend equation has the form Ft = a + b * t Where t = specified number of time periods from t = 0 Ft = forecast for period t a = value of Ft at t = 0 b = slope of the line The time series trend equation is given by Ft = 25.3 +2.1 * X Where X = specified number of time period The forecast for period 7 that is X = 7 is given by Ft = 25.3 +2.1 * X = 25.3 + 2.1 * 7

= 40.0 Hence, the forecast for period 7 is 40.0

Question 7

1 points Save For a given product demand, the time series trend equation is 53 - 4 X. The negative sign on the slope of the equation is a mathematical impossibility is an indication that the forecast is biased, with forecast values lower than actual values is an indication that product demand is declining implies that the coefficient of determination will also be negative implies that the RSFE will be negative

Answer: is an indication that product demand is declining Explanation: The negative sign on the slope of the equation indicates there is a inverse relationship between the two variables X and Y. Hence the correct choice is is an indication that product demand is declining

Question 8

1 points Save In trend-adjusted exponential smoothing, the forecast including trend (FIT) consists of

an exponentially smoothed forecast and an estimated trend value an exponentially smoothed forecast and a smoothed trend factor the old forecast adjusted by a trend factor the old forecast and a smoothed trend factor a moving average and a trend factor

Answer: an exponentially smoothed forecast and a smoothed trend factor Explanation: The trend adjusted forecast (TAF) is composed of two elements: smoothed error and a trend factor TAFt+1 = St + Tt Where St = previous forecast plus smoothed error Tt = current trend estimate

Question 9

1 points Save Which of the following is true regarding the two smoothing constants of the Forecast Including Trend (FIT) model? One constant is positive, while the other is negative. They are called MAD and RSFE. Alpha is always smaller than beta. One constant smoothes the regression intercept, whereas the other smoothes the regression slope. Their values are determined independently.

Answer: One constant smoothes the regression intercept, whereas the other smoothes
the regression slope

Explanation: For the the two smoothing constants of the Forecast Including Trend (FIT) model, it is true that one constant smoothes the regression intercept, whereas the other smoothes the regression slope.

Question 10

1 points Demand for a certain product is forecast to be 800 units per month,

averaged over all 12 months of the year. The product follows a seasonal pattern, for which the January monthly index is 1.25. What is the seasonally-adjusted sales forecast for January? 640 units 798.75 units 800 units 1000 units cannot be calculated with the information given

Answer: 1000 units Explanation: Seasonally-adjusted sales forecast for January = 800 * 1.25 = 1000 units.

Question 11

1 points Save A seasonal index for a monthly series is about to be calculated on the basis of three years' accumulation of data. The three previous July values were 110, 150, and 130. The average over all months is 190. The approximate seasonal index for July is 0.487 0.684 1.462 2.053 cannot be calculated with the information given

Answer: 0.684 Explanation: The three year average of July month =

110 150 130 3

390 3

= 130 The seasonal index of the July moth is =

July moth average Over all month average

130 190

=0.684 Hence, the seasonal index of the July moth is 0.684

Question 12

1 points The percent of variation in the dependent variable that is explained by the regression equation is measured by the mean absolute deviation slope coefficient of determination correlation coefficient intercept

Answer: coefficient of determination Explanation: The coefficient of determination (R-square) value indicates that the percent of variation in the dependent variable that is explained by the regression equation.
Question 13 1 points

If two variables were perfectly correlated, the correlation coefficient r would equal

0 less than 1 exactly 1 -1 or +1 greater than 1

Answer: - 1 or +1 Explanation: Since, the correlation coefficient r lies between ranges from -1 to +1. If the r value is -1 then there is a perfect negative correlation exists, if the r value is +1 indicates that there is a perfect positive correlation exist between two variables.

Question 14

1 points The last four weekly values of sales were 80, 100, 105, and 90 units. The last four forecasts were 60, 80, 95, and 75 units. These forecasts illustrate qualitative methods adaptive smoothing slope bias trend projection

Question 15

1 points

> Use the three-month moving-average method to forecast sales for June. Fewer than or equal to 20 units Greater than 20 but fewer than or equal to 22 units Greater than 22 but fewer than or equal to 24 units Greater than 24 units

Answer: Greater than 24 units

Explanation: The Three-month moving total carried out as follows: The June month moving total is given by 22 +28+24 = 74 Three month moving averages for month June =

Three month total 3 74 3

= 24.67 Calculation Three Year Moving average:

Actual Sales 3-Month Moving Average

Month

3-Month Moving Total

January February March April May June

23 18 22 28 24

63 68 74

21.00 22.67 24.67

From the above table we see that the 3-month moving average for June month is 24.67

Question 16

1 points

> What is the forecast for July with the two-month moving-average method and June sales of 40 units? Fewer than or equal to 25 units Greater than 25 but fewer than or equal to 30 units Greater than 30 but fewer than or equal to 35 units Greater than 35 units

Answer: Greater than 30 but fewer than or equal to 35 units

Explanation: The Three-month moving total carried out as follows: The July month moving total (Two months) is given by 24 + 40 = 64 Two month moving averages for month July =

Two month total 2

=

64 2

= 32

Calculation Two Year Moving average:

Month

Actual Sales

2-Month Moving Total

2-Month Moving Average

January February March April May June July

23 18 22 28 24 40

41 40 50 52 64

20.50 20.00 25.00 26.00 32.00

From the above table we see that the 2-month moving average for July month is 32.00

Question 17

1 points

The forecasting equation for a three-month weighted moving average is: Ft = W1Dt + W2Dt-1 + W3Dt-2 If the sales for June were 40 units and the weights are W1= 1/2, W2 = 1/3, and W3 = 1/6, what is the forecast for July? Assume Dt = June Demand = 40. Fewer than or equal to 30 units Greater than 30 but fewer than or equal to 33 units Greater than 33 but fewer than or equal to 36 units Greater than 36 units

Answer: Greater than 30 but fewer than or equal to 33 units Explanation:

The formula of forecasting equation for a three-month weighted moving average is given by Ft = W1Dt + W2Dt-1 + W3Dt-2 The forecasted value of July month is given by =

1 1 1 * 40 * 24 * 28 2 3 6

= 0.5*40 + 0.333*24 + 0.1667*28 = 20 +7.9999 + 4.667 = 32.667 Weighted Three- month moving average:
Month Demand 3-Month Weighted

(Dt)

Moving Average

January February March April May June July

23 18 22 28 24 40

20.83 24.33 25.00 32.67

Hence, the forecasted value of July month is 32.67

Question 18

1 points

> Using the 4-month weighted moving-average technique and the following weights, what is the forecasted demand for November?

> Fewer than or equal to 250 units Greater than 250 but fewer than or equal to 265 units Greater than 265 but fewer than or equal to 280 units

More than 280 units

Answer: Greater than 265 but fewer than or equal to 280 units Explanation:
The formula of forecasting equation for a Four-month weighted moving average is given by Ft = W1Dt + W2Dt-1 + W3Dt-2+ W4Dt-3 Where: W1 = most recent month = 50% = 0.5 W2 = one month ago = 20% = 0.2 W3 = Two month ago = 20% = 0.2 W4 = three month ago = 10% = 0.1

The forecasted value of December month is given by

= 0.5*250 + 0.2*280 + 0.2*310 +0.1*240 =125 +56+62+24 = 267 Hence, the forecasted value of December month is 267
Question 19 1 points

> Use an exponential smoothing model with a smoothing parameter of 0.30 and an

April forecast of 525 to determine what the forecast sales would have been for June. Fewer than or equal to 535 Greater than 535 but fewer than or equal to 545 Greater than 545 but fewer than or equal to 555 Greater than 555

Answer: Greater than 545 but fewer than or equal to 555 units Explanation: The Exponential smoothing forecast model is given below:

Ft 1 Yt (1 ) Ft
Where:
Ft 1 = forecast of the time series for period (t + 1)
Yt = actual value of the time series in period t

Ft = forecast of the time series for period t

= smoothing constant (0 1)
In our problem we see that the forecast value of April month is 525 and = 0.3 Therefore, the forecasted value of May month is given by F = 0.3* 550 + (1-0.30)*525 = 165 +367.5 = 532.5 The forecasted value of May month is 532.5

Similarly, the forecasted value of June month is given by F = 0.3*590 + (1-0.30)*532.5 = 177 +372.75 = 549.75 Hence, the forecasted value of June month is 549.75
Question 20 1 points

> Use the exponential smoothing method with = 0.5 and a February forecast of 500 to forecast the sales for May. Fewer than or equal to 530 Greater than 530 but fewer than or equal to 540 Greater than 540 but fewer than or equal to 550 Greater than 550

Answer: Greater than 530 but fewer than or equal to 540 units Explanation: The Exponential smoothing forecast model is given below:

Ft 1 Yt (1 ) Ft
In our problem we see that the forecast value (F) of February month is 500 and = 0.5 Therefore, the forecasted value of March month is given by

F = 0.5* 520 + (1-0.50)*500 = 260 +250 = 510 The forecasted value of March month is 510 Similarly, the forecasted value of April month is given by F = 0.5* 535 + (1-0.50)*510 = 267.5 +255 = 522.5 The forecasted value of April month is 522.5 The forecasted value of May month is given by F = 0.5* 550 + (1-0.50)*522.5 = 275 +261.25 = 536.25 The forecasted value of May month is 536.25

Question 21

1 points TOMBOW is a small manufacturer of pencils and has had the following sales record for the most recent five months:

>

Use an exponential smoothing model to forecast sales in months 2, 3, 4, and 5. Let the smoothing parameter > equal 0.6; select F1 = 150 to get the forecast started. The forecast for month 2 is: fewer than or equal to 120 units. greater than 120 but fewer than or equal to 140 units. greater than 140 but fewer than or equal to 160 units. greater than 160 units.

Answer: Greater than 140 but fewer than or equal to 160 units Explanation: The Exponential smoothing forecast model is given below:

Ft 1 Yt (1 ) Ft
Where:
Ft 1 = forecast of the time series for period (t + 1)

Yt = actual value of the time series in period t

Ft = forecast of the time series for period t

= smoothing constant (0 1)
The forecast value of first month is (F1) = 150 and = 0.6 The 2nd second moth (t + 1 = 1 + 1), the forecast (F2) is calculated as follows: F2 = F 1 Y1 (1 ) F 1 1 Where; = smoothing constant = 0.6

F2 0.6 *150 (1 0.6) *150

F2 = 90 + 0.4*150 = 90+ 60 = 150

Hence, the forecasted value of 2nd month is 150

Question 22

1 points TOMBOW is a small manufacturer of pencils and has had the following sales record for the most recent five months:

> Use an exponential smoothing model to forecast sales in months 2, 3, 4, and 5. Let the smoothing parameter > equal 0.6; select F1 = 150 to get the forecast started.

The forecast for month 4 is: fewer than or equal to 140 units. greater than 140 but fewer than or equal to 150. greater than 150 but fewer than or equal to 160 units. greater than 160 units.

Answer: Greater than 150 but fewer than or equal to 160 units Explanation:

The forecast value of second month is (F2) = 150 The 3rd second moth (t + 1 = 2 + 1), the forecast (F3) is calculated as follows: F3 = F1 2 Y2 (1 ) F2 Where; = smoothing constant = 0.6

F3 0.6 *145 (1 0.6) *150

= 87 + 60 = 147

Hence, the forecasted value of 3rd month is 147 Similarly, the forecasted value of 4th month is given by F4 = F13 Y3 (1 ) F3 Where; = smoothing constant = 0.6 F3 = the forecasted value of 3rd month = 147

F4 0.6 *160 (1 0.6) *147

= 96+58.8 = 154.8

Hence, the forecasted value of 4th month is 154 .8

Question 23 1 points TOMBOW is a small manufacturer of pencils and has had the following sales record for the most recent five months:

> Use an exponential smoothing model to forecast sales in months 2, 3, 4, and 5. Let the smoothing parameter = 0.6; select F1 = 150 to get the forecast started. The forecast for month 5 is: fewer than or equal to 150 units. greater than 150 but fewer than or equal to 160 units. greater than 160 but fewer than or equal to 170 units. greater than 170 units.

Answer: Greater than 160 but fewer than or equal to 170 units Explanation: The forecast value of second month is (F4) = 154.8 (by referring above answer) The 5th moth (t + 4 = 4 + 1), the forecast (F5) is calculated as follows: F5 Y4 (1 ) F4 Where; = smoothing constant = 0.6

F3 0.6 *180 (1 0.6) *154 .8

= 180 + 61.92 = 169.92

Hence, the forecasted value of 5th month is 169.92

Question 24

1 points Save TOMBOW is a small manufacturer of pencils and has had the following sales record for the most recent five months:

> Use an exponential smoothing model to forecast sales in months 2, 3, 4, and 5. Let the smoothing parameter = 0.6; select F1 = 150 to get the forecast started.

The cumulative sum of errors CFE from months 2 through 5 is: fewer than or equal to 80. greater than 80 but fewer than or equal to 85. greater than 87 but fewer than or equal to 90. greater than 90.

Answer: Greater than 80 but fewer than or equal to 85

Explanation: From the actual and the forecasted value obtained in the previous question, the cumulative sum of errors can be calculated as follows: Error = Actual Forecast Units Sold Forecast Error = Month (Actual) Ft Actual Forecast

1 2 3 4 5

150 145 160 180 220

150.00 150.00 147.00 154.80 169.92 Sum =

0.00 -5.00 13.00 25.20 50.08 83.28

From the above table, it can be clearly seen that the cumulative for months 2 through 5 is 83.28 which is greater than 80 but fewer than or equal to 85.

Question 25

1 points Save TOMBOW is a small manufacturer of pencils and has had the following sales record for the most recent five months:

Use an exponential smoothing model to forecast sales in months 2, 3, 4, and 5. Let the smoothing parameter equal 0.6; select F1 = 150 to get the forecast started.

What is the MAD for months 2 through 5? Less than or equal to 20 Greater than 20 but less than or equal to 25 Greater than 25 but less than or equal to 30 Greater than 30

Answer: Greater than 20 but less than or equal to 25 Explanation: From the Cumulative sum of errors CFE obtained in the previous question, the Mean Absolute Deviation (MAD) can be calculated as follows:

MAD =

( Actual Forecast )
n

Month 1 2 3 4 5

Units Sold 150 145 160 180 220

Ft 150.00 150.00 147.00 154.80 169.92

Error 0.00 -5.00 13.00 25.20 50.08 83.28 MAD =

| Error| 0 5 13 25.2 50.08 93.28 23.32

From the above table, we have

MAD =

( Actual Forecast )
n

93.28 = 23.32 4

Thus, the MAD for months 2 through 5 is 23.32 which is greater than 20 but less than or equal to 25.

Question 26

1 points Save A sales manager wants to forecast monthly sales of the machines the company makes using the following monthly sales data.

> Use this information, and use the 3-month weighted moving-average method to calculate the forecast for month 9. The weights are 0.60, 0.30, and 0.10, where 0.60 refers to the most recent demand. $3,916 $3,880 $3,396 $3,229

Answer: $ 3,916 Explanation: The formula of forecasting equation for a three-month weighted moving average is given by Ft+1 = W1Dt + W2Dt-1 + W3Dt-2

The forecasted (3-month weighted moving average) value of the 3rd month (t = 3) is calculated as follows:
F3 1 W1 * B3 W2 * B2 W3 * B1

F4 = 0.60 * 3469 + 0.30 * 2558 + 0.10 * 3803 = 3229.1

Similarly, the forecasted values for the remaining months (4th to 8th month) have been calculated and are presented in the following table:
Ft Month Balance 1 3803 2 2558 3 3469 4 3442 3229.1 5 2682 3361.7 6 3469 2988.7 7 4442 3230.2 8 3728 3974.1 9 3916.3

From the above table, we can see that the forecasted value for the month of 9 is 3,916.3 or approximately 3,916.

Question 27

1 points Save A sales manager wants to forecast monthly sales of the machines the company makes using the following monthly sales data.

> Use this information, if the forecast for period 7 is $4,300, what is the forecast for period 9 using exponential smoothing with an alpha equal to 0.30? $4,300

$4,342 $4,158 $3,957

Answer: $ 4,158 Explanation: The forecast value of 7 month is (F7) is given as 4,300 Then, the forecast for the 8th month, F8 (t + 1 = 7 + 1 = 8) is calculated as follows: F8 Y7 (1 ) F7 .where = smoothing constant = 0.30

F8 0.30 * 4,442 (1 0.3) * 4,300 = 4342.60

Now, the forecast for the 9th month, F9 is calculated as follows: F9 Y8 (1 ) F8 F9 = 0.30 * 3728 + (1 0.30) * 4342.60 = 4158.22 or 4158 (approximately)

Question 28

1 points Save The management of an insurance company monitors the number of mistakes made by telephone service representatives for a company they have subcontracted with. The number of mistakes for the past several months appears in this table along with forecasts for errors made with three different forecasting techniques. The column labeled Exponential was created using exponential smoothing with an alpha of 0.30. The

column labeled MA is forecast using a moving average of three periods. The column labeled WMA uses a 3-month weighted moving average with weights of 0.65, 0.25, and 0.10 for the most-to-least recent months.

> Using this table, what is the MSE for months 6-10 for the exponential smoothing technique? Less than 591 Greater than or equal to 591 but less than 595 Greater than or equal to 595 but less than 599 Greater than 599

Answer: Greater than 599 Explanation: The formula for MSE (Mean Square Error) is given below:

(Y
MSE =
i 1

Yi ) 2 n

Mistakes Exponential Month 1 2 3 4 5

Yi
55 61 71 77 88

(Yi Y ) 2

71 71 73

0 36 231.04

6 7 8 9 10

100 109 122 126 126

77 84 92 101 108

512.57 617.42 923.77 638.85 313.04

From the above table, the square of the deviation (Yi Y ) 2 has been calculated for the month 3
through 10 and we have highlighted the values for the month 6 through 10. Now, the sum of the square of the deviation for the month 6 through 10 has been calculated and is given by

(Y
i 6

10

Yi ) 2 = 512.57 + 617.42 + 923.77 + 638.85 + 313.04 = 3005.65

n

(Y
MSE =
i 1

Yi ) 2 n

3005.62 = 601.131 5

Thus, the value of MSE for the month 6-10 is 601.131 that is greater than 599.

Question 29

1 points Save The management of an insurance company monitors the number of mistakes made by telephone service representatives for a company they have subcontracted with. The number of mistakes for the past several months appears in this table along with forecasts for errors made with three different forecasting techniques. The column labeled Exponential was created using exponential smoothing with an alpha of 0.30. The column labeled MA is forecast using a moving average of three periods. The column labeled WMA uses a 3-month weighted moving average with weights of 0.65, 0.25, and 0.10 for the most-to-least recent months.

> Using this table, what is the order of the forecasting techniques from most accurate to least accurate based on their errors for months 6-10? Exponential smoothing, weighted moving average, moving average Exponential smoothing, moving average, weighted moving average Moving average, exponential smoothing, weighted moving average Weighted moving average, moving average, exponential smoothing

Answer: Weighted moving average, moving average, exponential smoothing Explanation:

The formula for MSE (Mean Square Error) is given below:

(Y
MSE =
i 1

Yi ) 2 n

For the given data, the MSE has been calculated for the given three models and are shown below:

Month

Mistakes

Exponential

1 2 3 4 5 6 7 8 9 10

55 61 71 77 88 100 109 122 126 126

71 71 73 77 84 92 101 108 SUM (6th to 10th) = MSE (6th to 10th) =

0 36 231.04 512.57 617.42 923.77 638.85 313.04 3005.65 601.13

Month 1 2 3 4 5 6 7 8 9 10

Mistakes 55 61 71 77 88 100 109 122 126 126

MA

62 70 79 88 99 110 119 SUM (6th to 10th) = MSE (6th to 10th) =

225 324 441 441 529 256 49 1716.00 343.20

Month 1 2 3 4 5 6 7 8 9

Mistakes 55 61 71 77 88 100 109 122 126

WMA

67 74 84 95 105 117

100 196 256 196 289 81

10

126

123 SUM (6th to 10th) = MSE (6th to 10th) =

9 831.00 166.20

The forecasting techniques have been ordered from most accurate to least accurate based on their MSE for months 6-10 and are presented below:
Model WMA MA EXPONENTIAL MSE 161 323.57 409.09 RANK 1ST 2ND 3RD

Thus, the order of the forecasting models is:

Weighted moving average (WMA), Moving Average (MA), Exponential Smoothing

Question 30

1 points Save The management of an insurance company monitors the number of mistakes made by telephone service representatives for a company they have subcontracted with. The number of mistakes for the past several months appears in this table along with forecasts for errors made with three different forecasting techniques. The column labeled Exponential was created using exponential smoothing with an alpha of 0.30. The column labeled MA is forecast using a moving average of three periods. The column labeled WMA uses a 3-month weighted moving average with weights of 0.65, 0.25, and 0.10 for the most-to-least recent months.

> Using this table, what is the mean absolute percent error for months 610 using the exponential smoothing forecasts? Less than 22% Greater than or equal to 22% but less than 24% Greater than or equal to 24% but less than 26% Greater than 26%

Answer: Less than 22% Explanation:

The mean absolute percent error is given by the following formula:

MAPE

100 n Yi Fi n i 1 Yi

Month 1 2 3

Mistakes 55 61 71

Exponential

Yi Fi Yi

71

4 5 6 7 8 9 10

77 88 100 109 122 126 126

71 73 77 84 92 101 108 SUM = 100/n = 100/5 MAPE =

0.23 0.23 0.25 0.20 0.14 1.04 20.00 20.8902

From the above table, we have

MAPE

100 n Yi Fi = 20.8902, which is less than 0.22 (or 22%). n i 1 Yi

QUESTION 31. A. B. C.

A. Compute descriptive statistics for each stock and the S&P 500. Comment on the results. Which stocks are the most volatile? B. Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in a down market? C. Comment on how much of the return for the individual stocks is explained by the market.

Solution: (a) Descriptive Statistics There are 8 stocks and S&P 500 which the the descriptive statistics has been calculated using Excel tool (Data Data Analysis Descriptive Statistics) and the results are presented below:

Microsoft Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum 0.005025556 0.00756193 0.004 #N/A

Exxon Mobil Mean Standard Error Median Mode Standard 0.045371583 Deviation 0.002058581 Sample Variance 0.939971773 Kurtosis 0.02437306 Skewness 0.17084 Range -0.08201 Minimum 0.08883 Maximum 0.18092 Sum 0.016637222 0.009223348 0.012785 #N/A

Caterpillar Mean Standard Error Median Mode Standard 0.055340091 Deviation 0.003062526 Sample Variance 6.584302068 1.518293912 0.34863 -0.11646 0.23217 0.59894 Kurtosis Skewness Range Minimum Maximum Sum 0.030097222 0.011427209 0.040815 #N/A 0.068563251 0.004700919 0.285743719 0.330594767 0.31907 -0.1006 0.21847 1.0835

Count

36 Count

36 Count

36

For the Stock Microsoft, the mean return is 0.00503 and its standard deviation is 0.0454. The coefficient of variation (CV) for the return of Microsoft is given by CV = Standard deviation / Mean = 0.00756 / 0.0454 = 9.03 %

For the Stock Exxon Mobil, the mean return is 0.0166 and its standard deviation is 0.0553. The coefficient of variation (CV) for the return of Exxon Mobil is given by CV = Standard deviation / Mean = 0.0553 / 0.0166 = 3.33 %

For the Stock Caterpillar, the mean return is 0.0301 and its standard deviation is 0.0686 The coefficient of variation (CV) for the return of Caterpillar is given by CV = Standard deviation / Mean = 0.0686 / 0.0301 = 2.28 %

Johnson & Johnson Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum 0.005295556 0.005811 -0.001475 #N/A 0.034866 0.001215638 0.434491683 0.595957212 0.16251 -0.05917

McDonald's Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum 0.02447417 0.0113494 0.037015 #N/A 0.06809637 0.00463712 0.224422 0.2101202 0.297 -0.11443

Sandisk Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum 0.06926194 0.03256624 0.074135 #N/A 0.19539743 0.03818016 -0.1931613 0.30934715 0.78496 -0.28331

Maximum Sum Count

0.10334 Maximum 0.19064 Sum 36 Count

0.18257 Maximum 0.88107 Sum 36 Count

0.50165 2.49343 36

For the Stock Johnson & Johnson, the mean return is 0.0053 and its standard deviation is 0.0349 The coefficient of variation (CV) for the return of Johnson & Johnson is given by CV = Standard deviation / Mean = 0.0349 / 0.0053 = 6.584 %

For the Stock McDonald's, the mean return is 0.0245 and its standard deviation is 0.0681 The coefficient of variation (CV) for the return of McDonald's is given by CV = Standard deviation / Mean = 0.0681 / 0.0245 = 2.782 %

For the Stock Sandisk, the mean return is 0.0693 and its standard deviation is 0.1954 The coefficient of variation (CV) for the return of Sandisk is given by CV = Standard deviation / Mean = 0.1954 / 0.0693 = 2.821 %

Qualcomm Mean Standard Error Median Mode Standard Deviation Sample Variance 0.02836028 0.01436449 0.038705 #N/A

Procter & Gamble Mean Standard Error Median Mode Standard 0.08618695 Deviation 0.00742819 Sample Variance 0.01058856 0.00617781 0.0133255 #N/A 0.03706685 0.00137395

Kurtosis Skewness Range Minimum Maximum Sum Count

-0.4890999 0.00243987 0.33225 -0.1217 0.21055 1.02097 36

Kurtosis Skewness Range Minimum Maximum Sum Count

-0.5558073 0.15628025 0.141483 -0.05365 0.087833 0.381188 36

For the Stock Qualcomm, the mean return is 0.0284 and its standard deviation is 0.0862 The coefficient of variation (CV) for the return of Qualcomm is given by CV = Standard deviation / Mean = 0.0862 / 0.0284 = 3.039 %

For the Stock Procter & Gamble, the mean return is 0.0106 and its standard deviation is 0.0371 The coefficient of variation (CV) for the return of Procter & Gamble is given by CV = Standard deviation / Mean = 0.0371 / 0.0106 = 3.501 %

The coefficient of variation for the 8 stocks is consolidated below:

Stock

CV
9.028 (most volatile) 3.326 2.278 6.584 2.782 2.821

Microsoft
Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk

Qualcomm Procter & Gamble

3.039 3.501

From the above table, we can see that the coefficient of variation for the stock Microsoft is 9.028 which is the highest value as compared to that of other stocks. Thus, the most volatile stock is the Microsoft as it has highest coefficient of variation.

(b) Beta coefficient: The beta coefficient can be calculated by the following formula: Beta =
Covariance (Stock Price, S & P Index) Variance(S & P Index)

Using Excel tool, the values of beta for the given 8 stocks have been calculated and are shown below: Beta (for Microsoft) =
Covariance (Stock Price, S & P Index) 0.0031 = = 0.4584 Variance(S & P Index) 0.000674

Similarly, the beta for the remaining stocks has been calculated and is presented below:

Covariance Microsoft Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble S&P 500 0.00031 0.00049 0.00101 0.00001 0.00101 0.00176 0.00095 0.00034

Variance

Beta 0.4584 Less Volatile 0.7309 Less Volatile 1.4932 > 1 More Volatile 0.0087 Less Volatile 1.5032 > 1 More Volatile 2.6049 > 1 More Volatile 1.4138 > 1 More Volatile 0.5065 Less Volatile

0.0006740

Going by the above table, we can see that the beta value for the stocks Caterpillar, McDonalds, Sandisk and Qualcomm are greater than 1 which indicates that those stocks are Most Volatile.

(c) Comment on how much of the return for the individual stocks is explained by the market.

In order to calculate the amount of return for the individual stocks that is explained by the market (S&P 500), we need to calculate the R-square value. Using Excel function, the correlation coefficient has been calculated from which the R-square (square of correlation) values for all the stocks have been calculated and are presented below:

S&P 500 Microsoft Exxon Mobil Caterpillar

r 0.2660 0.3477 0.5734

r^2 0.070754 0.120929 0.328805

R^2 in % 7.0754% 12.0929% 32.8805%

Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble

0.0066 0.5812 0.3510 0.4319 0.3598

0.000044 0.337813 0.123206 0.186552 0.129460

0.0044% 33.7813% 12.3206% 18.6552% 12.9460%

From the above table, we have R-square value for the pair Microsoft and S&P 5000 = 7.08% The above R-square value indicates that there is approximately 7.08% of the total variation in the dependent variable Microsoft is explained by the market (S&P 500). That is, there is approximately 7.08% of the return for the stock Microsoft is explained by the market (S&P 500). Similarly, R-square value for the pair Exxon Mobil and S&P 5000 = 12.09% That is, there is approximately 12.09% of the return for the stock Exxon Mobil is explained by the market (S&P 500).

R-square value for the pair Caterpillar and S&P 5000 = 32.88% That is, there is approximately 32.88% of the return for the stock Caterpillar is explained by the market (S&P 500). R-square value for the pair Johnson & Johnson and S&P 5000 = 0.0044% That is, there is approximately 0.004% of the return for the stock Johnson & Johnson is explained by the market (S&P 500). R-square value for the pair McDonald's and S&P 5000 = 33.78%

That is, there is approximately 33.78% of the return for the stock McDonald's is explained by the market (S&P 500). R-square value for the pair Sandisk and S&P 5000 = 12.32% That is, there is approximately 12.32% of the return for the stock Sandisk is explained by the market (S&P 500).

R-square value for the pair Qualcomm and S&P 5000 = 18.66% That is, there is approximately 18.66% of the return for the stock Qualcomm is explained by the market (S&P 500). R-square value for the pair Procter & Gamble and S&P 5000 = 12.95% That is, there is approximately 12.95% of the return for the stock Procter & Gamble is explained by the market (S&P 500).

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