Question

Consider the following time series data.

Month	1	2	3	4	5	6	7
Value	20	28	24	29	25	24	29

(a)

Compute MSE using the most recent value as the forecast for the next period. What is the forecast for month 8?

(b)

Compute MSE using the average of all the data available as the forecast for the next period. What is the forecast for month 8?

(c)

Which method appears to provide the better forecast?

Answer 1

a) Forecast as most recent value

MSE = Mean of squared errors = 24.5

Forecast for month 8 = 29

b) forecast = average of all data available

MSE = mean of squared error = 17.75

Forecast for 8 month = 25.57

c) Average of previous months as forecast is better forecast because of less MSE