Discussion Week 4 Choose one of the forecasting methods and explain the rationale behind using it in real-life.

I would choose to use the exponential smoothing forecast method because it weighs the most recent past data more strongly than more distant past data. This makes it so that the forecast will react more strongly to immediate changes in the data. This is good to examine when dealing with seasonal patterns and trends that may be taking place. I would find this information very useful when examining the increased production of a product that appears to be in higher demand in recent times than past. Describe how a domestic fast food chain with plans for expanding into China would be able to use a forecasting model. By looking at the data of other companies the fast food chain would be able to put together a forecast to determine if their business venture was viable. They could examine the sales data and determine through a exponential smoothing forecast if it made sense for them to enter into the market. This would show the trends and changes in the data more recently rather than in past time.

What is the difference between a causal model and a time- series model? Give an example of when each would be used. The timeseries model is based on using historical data to predict future behavior. This method could be used by a retail store, fast food restaurant or clothing manufacturer to predict sales for an upcoming season change. The causal model uses a mathematical correlation between the forecasted items and factors affecting how the forecasted item behaves. This would be used by companies would do not have access to historical data therefore they would use a competitors available data. What are some of the problems and drawbacks of the moving average forecasting model? In statistics, a moving average, also called rolling average, rolling mean or running average, is a type of finite impulse response filter used to analyze a set of data points by creating a series of averages of different subsets of the full data set. A moving average is not a single number, but it is a set of numbers, each of which is the average of the corresponding subset of a larger set of data points. A moving average may also use unequal weights for each data value in the subset to emphasize particular values in the subset. A moving average is commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly. For

example, it is often used in technical analysis of financial data, like stock prices, returns or trading volumes. It is also used in economics to examine gross domestic product, employment or other macroeconomic time series. Critics of the simple moving average argue that it is too simple in the sense that it gives the same weight to each point in moving average calculation. The problem with this it is argued is that the more recent data points deserve a greater weighting in the formula as they are more relevant to the future price action of the instrument. In particular this model does not produce an actual equation. Therefore, it is not all that useful as a medium-long range forecasting tool. It can only reliably be used to forecast a few periods into the future. Source: http://en.wikipedia.org/wiki/Moving_average How do you determine how many observations to average in a moving average model? How do you determine the weightings to use in a weighted moving average model? Given a series of numbers and a fixed subset size, the first element of the moving average is obtained by taking the average of the initial fixed subset of the number series. Then the subset is modified by "shifting forward", that is excluding the first number of the series and including the next number following the original subset in the series. This creates a new subset of numbers, which is averaged. This process is repeated over the entire data series. The plot line connecting all the (fixed) averages is the moving average. A moving average is a set of numbers, each of which is the average of the corresponding subset of a larger set of datum points. A moving average may also use unequal weights for each datum value in the subset to emphasize particular values in the subset.