Question

Consider the following time series data:

Month 1 2 3 4 5 6 7

Value 25 14 21 13 20 23 14

(a) Compute MSE using the most recent value as the forecast for the next period. If required, round your answer to one decimal place. What is the forecast for month 8? If required, round your answer to one decimal place. Do not round intermediate calculation.

(b) Compute MSE using the average of all the data available as the forecast for the next period. If required, round your answer to one decimal place. Do not round intermediate calculation. What is the forecast for month 8? If required, round your answer to one decimal place.

(c) Which method appears to provide the better forecast?

Answer 1

a)

month	value	Forecast	(error)^2
1	25
2	14	25	121
3	21	14	49
4	13	21	64
5	20	13	49
6	23	20	9
7	14	23	81
		total	373
		average	62.17

MSE =62.2

forecast =14

b)

month	value	Forecast	(error)^2
1	25
2	14	25.00	121.00
3	21	19.50	2.25
4	13	20.00	49.00
5	20	18.25	3.06
6	23	18.60	19.36
7	14	19.33	28.44
		total	223.12
		average	37.19

MSE =37.2

forecast =18.6

c)

average of all the data available due to smaller MSE