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Basically, “time series” forecasting is a time ordered sequence of datasets taken at regular intervals. Datasets given daily values of closing prices of Intel, Microsoft and General Electrics in the range between 7/11/1999 and 11/12/1999 that includes 89 days. For every material, 7 time series forecasting methods are applied that are Naive Method, Moving Average Method, Weighted Moving Average Method, Exponential Smoothing, Holt’s Exponential Smoothing, Linear Regression and Winter’s Exponential Smoothing Method. Also, relation between the forecasted values and actual values are compared in the line graph. After the observations and analysis, RMSE, MSE, MAD and MAPE error measuring techniques applied to datas to determine the better time series forecasting method. For the first company “Intel” , there is short explanations about the forecasting method which is applied and there is snapshots from MS Excel to show readers the components of formulas and help them to understand how methods are applied to datasets. Also, there is an appendix part at the end of the project that includes detailed explanations of methods. These procedeures are valid for all forecast of these project. All last 20 days assumed as unknown and fillid with turquaze color. Because of last 20 days assumed unknown, the actual values that we need to calculete next forecasted values calculated by using previous forecasting values. For example, F(t-1) values used as an actual value A(t) to calculate F(t+1). MSE = mean square error RMSE = root mean square error MAD= mean absolute deviation MAPE= mean absolute percent error A(t)= actual value at time t F(t)= forecasted value at time t

1.1 Intel 1.1.1. Naive Forecast Ens 208, Fall 2006 Project 01 Emre Eryılmaz 1

Naive Method is simple but widely used in many areas. This method uses single previous value of a time series as the basis of the forecast. See Appendix A for details.

Figure 1. Naive Method Forecasting We forecasted the first day of the 20 days by using actual values and than we calculated the 19th day by using th first forecasted value as an actual value of that time.

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Figure 2. Error determination in Naive Method The graph of Naive Method is;

Figure 3. Actual vs. Forecasting 1.1.2. Moving Average Method, Ens 208, Fall 2006 Project 01 Emre Eryılmaz 3

One of the advantage of moving avarage method is that you can use historical data by using period of time. In this method we will calculate the value of the next period by taking avarage value of the previous “N” actual values. One can use “Average” or “Sum/Count” commands to calculate avarage value. See Appendix B for details.

**1.1.2.1.Moving Average Method, N=69;
**

We used different “N” values to understand how the period of the time affects the accuracy of the forecasting. First take N equal to 69 to understand how a long period of time determines the accuracy of the forecasting. And then we took smaller range to show the difference between big ranges and small ranges.

Figure 4. Calculation of Moving Average with N=69

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Figure 5. Error calculation

Figure 6. Actual vs. Forecasting, N=69 Ens 208, Fall 2006 Project 01 Emre Eryılmaz 5

1.1.2.2. Moving Average Method, N=20;

Figure 7. Calculation og forecasting, N=20

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Figure 8. Error calculation, N=20

Figure 9. Actual vs. Forecasting, N=20

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1.1.2.3. Moving Average Method, N=10;

Figure 10. Calculation of forecasting, N=10

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Figure 11. Error calculation, N=10

**Figure 12. Actual vs. Forecasting, N=10
**

1.1.2.4. Moving Average Method, N=5;

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Figure 13. Forecast Calculation, N=5

Figure 14. Error calculation, N=5

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Figure 15. Actual vs. Forecasting, N=5

For Intel, in moving avarage method, when we decrease the N value as it seen generally RMSE, MSE, MAD, MAPE values increases. When N=69, we have smalest and when N=5, we have the largest error. This situation may stem from weekly closing prices may change but if we look at overall closing prices, it is more closer to actual values. 1.1.3 Weighted Moving Average In this method, forecast made by multiplying every character with a weight constant with te previous values and taking the sum of these values. See Appendix C for details.

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Figure 16. Calculation of Forecast a,b,c,d and e values are found by minimizing RMSE value of the first 69 days by using solver. The value of RMSE in the picture is minimized. In the solver scene constrains are the a,b,c,d,e and t values that are the weight constant that are found by using Solver.

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Figure 17. Using Solver in Weighted Moving Average The RMSE and other error values are for the last 20 days.

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Figure 18. Eror calculation

Figure 19. Actual vs. Error 1.1.4. Exponential Smoothing Alpha constant s used in this method to be able to calculate better forecasting values. Alpha is found by using Solver. See Appendix D for details.

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Figure 20. Using Solver in Expo. Smoothing

Figure 21. Error calculation

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Figure 22. Actual vs. Forecast 1.1.5. Holt’s Exponential Smoothing In this method, forecast is calculated by using 2 different components that are smoothed forecasting F(t) and trend estimateT(t). F(t) and T(t) both includes smothing constants alpha and beta. These two constants are used while calculating F(T) and T(t). See appendix E for details. Constants are calculated by using Solver according to last 69 days.

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Figure 23. Calculatin alpha by using Solver

Figure24. Error Calculation

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Figure 24. Actual vs. Forecasting 1.1.6. Linear Regression Linear regression method based on the slope of the actual values because of time. Slope is represented by “b”. There is a slope function in excel, so we can fin easily the slope of the datas.

Date order(1st column)

Actual values (3rd column)

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b= Slope(C28:C96;A28:A96) Figure 25. Calculation of Slope “a” represents the intersection point of y axis and the x axis where x =0. “Intersept” command is very useful to find a value in Excel.

Figure 26. Calculation of Intercept

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Figure 27. Error and Forecast Calculation

Figure 27. Actual vs. Forecasting 1.1.7 Winter’s Exponential Smoothing In this method there is additional seasonality(St) factor affects the calculation of forecasts. For seasonality, there is also a smoohing constant that is gamma besides alpha and beta constans of F(t) and T(t).

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Similarly alpha and beta, gamma constant is also in the range of 0 and 1. Because of the seasonality factor in winter’s method, it provides better forecasting values. So, the sensivity for seasonal chances is higher than the other methods. The formula of seoanality is; S(t+1)= µA(t)/F(t)+(1-µ)S(t-p) µ is gamma and p is the period. First S(t) values found by taking avarage of theactual values that period divided by actual value at time t. Period is 5 and because of datas we have weekly values without weekends we take p=5.

Figure 28. Calculation of Seasonality Trend is also component of Winter’s method. The trend formula is; T(t)=β*(F(t+1)-F(t))+(1-β)*T(t)

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Figure 29. Calculation of Trend F(t)= α*A(t)/S(t-p)+(1- α)*(F(t)-A(t)) and W(t+m)=(F(t)+m*T(t)*S(t+m-p)

Figure 30. Determination of constants and calculation of F(t) and W(t)

Figure 31. Error determination

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Figure 32. Actual vs. Forecast The best model for Intel is Moving Average Method with N=69. It is a little surprising because there is more complicated methods give bigger RMSE. If we look at the forecast and actual values of Mov. Aver. N=69, we see that values are increasing or decreasing similarly. And if we look at the graph We. Mov. line is close to avarage of last 20 days values. That also may be the reason of weighted moving averages values closer to actual values than other methods. Also, because of there is no sharp decreases or increases in actual values, avarage values are similar to these values. That is also another reason that moving average method give better values than Winter’s exponential smoothing.

1.2. Microsoft 1.2.1 Naive Method

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Figure 33. Calcution of Forecast

Figure 34. Calculation of Errors

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Figure 35. Actual vs. Forecast 1.2.1 Moving Average Method 1.2.1.1 N=69

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Figure 36. Calculation of Errors

Figure 37. Actual vs. Forecast 1.2.1.2. N=20

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Figure 38. Error calculation

Figure 39. Forecast vs. Actual 1.2.1.3. N=10

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Figure 40. Calculation of Errors

Figure 41. Actual vs. Forecast 1.2.1.4. N=5

Figure 42. Error calculation Ens 208, Fall 2006 Project 01 Emre Eryılmaz 28

Figure 43. Forecast vs. Actual The best two N value is N=69 and N=5 and worsts are N=20 and N=10. The reason that 69 is the best one may be increase and decrease in the actual values keeps it in long term close to stable. The reason 5 is the second best value is may it adjust itself to short terms decrease and increase. N= 10, 69 do not adjust itself so they have bigger RMSE. 1.2.2. Weighted Moving Average

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Figure 44. Forecast and Error Calculation

Figure 45. Actual vs Forecast 1.2.3 Exponential Smoothing

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Figure 46. Forecast and Error Calculation

Figure 47. Actual vs Forecast 1.2.4. Holt’s Exponential Smoothing

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Figure 48. Forecast and Error Calculation

Figure 49. Actual vs Forecast

1.2.5 Linear Regression Ens 208, Fall 2006 Project 01 Emre Eryılmaz 32

Figure 50. Forecast and Error Calculation

Figure 51. Actual vs Forecast

1.2.6. Winter’s Exponential Smoothing

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Figure 52. Forecast and Error Calculation

Figure 53. Actual vs Forecast For Microsoft, Moving Average, N=69 is the best model according to RMSE. If we look at the graph actual value and forecast for N=69, it is seen that forecast values are very close to middle of decrease and increase of the actual values. For this reason RMSE is small. The worst on is Naive Method, because it uses only the previous t, it could not adjust itself to Ens 208, Fall 2006 Project 01 Emre Eryılmaz 34

differences. If we compare Microsoft with Intel, it may seen that generally models fits better to Microsoft actual calues.

1.3 General Electric 1.3.1. Naive Method

Figure 54. Error Calculation

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Figure 55. Actual vs Forecast

1.3.2 Movin Average 1.3.2.1. N=69

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Figure 56. Error Calculation

Figure 57. Actual vs Forecast

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1.3.2.2. N=20

Figure 58. Error Calculation

Figure 59. Actual vs Forecast

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1.3.2.3. N=10

Figure 60. Error Calculation

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Figure 61. Actual vs Forecast

1.3.2.4. N=5

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Figure 62. Error Calculation

Figure 63. Actual vs Forecast The best N values are N=20 and N=10. The worst one is N=69. Because of there is an increase in the actual values of G.E., mov. avererage used previous lower level values, so RMSE is high. Also, sensivity is important here and mov. average and naive cannot adjust Ens 208, Fall 2006 Project 01 Emre Eryılmaz 41

itself. Unlike Intel and Microsoft, the actual values of G.E. changes more sharply. So, sensivity becomes important. 1.3.3. Weighted Moving Average

Figure 64. Error Calculation

Figure 65. Actual vs Forecast

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1.3.4. Exponential Smoothing

Figure 66. Error Calculation

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Figure 67. Actual vs Forecast

1.3.5. Holt’s Exponential Smoothing

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Figure 68. Forecast and Error Calculation

Figure 69. Actual vs Forecast

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1.3.6. Linear Regression

Figure 70 Forecast and Error Calculation

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Figure 71 Actual vs Forecast

1.3.7. Winter’s Exponential Smoothing

Figure 72 Forecast and Error Calculation

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Figure 73 Actual vs Forecast Although we expect winter will fit the best, we get the lowest RMSE by the Lineer Regression method. The worst model is again Naive Method. Mov. Average method with N=5 is the second and also good relatively to other methods. The reason that Linear Regression fit the best is that it adjust itself the increase in the actual values and at the end of 20 days it give the lowest RMSE. As a conclusion of this part; Moving Average Method is the most suitable model for Intel and Microsoft. Naive method provide bad results. Winter method is not the most suitable but it provided good forecasting values because of its seasonality and can consider sharp increases and decreases. Generally, Winter and Holt’s methods provide similar forecasting values.

2. Seasonality Seasonality is basically repeating movements in series. If there is similarity of seasonality graphics of different materials, it can be said that these materials effects each other. So, seasonality graphics gives us the idea of there is a relationship between the seanalities or there is not a relationship. In this section we will look at the seasonality graphics of Intel, Microsoft

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and G.E. to understand is there a relationship between these firms. The values are taken from the winter’s seasonality (St) calculation.

Figure 74. Seasonality Graph It is easily seen in figure 74 that the seasenality values are not exactly same but the behaviour of the firms is very identical. Especially, G. E. And Microsoft shows very similar behaviour. If we look at the peaks and valleys of these 2 firm they are at the same date. Because of the seasonality reapets itself we should look only one period that consists 5 days.

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Figure 75. Seasonality graph of 5 days As mentioned before, values are not identical but increase and decrease times are identical. If one increase or decrease the other one too. So, we can say there is a relationship between these firms. We should look at production graphs to see the relationship of these firms.

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Figure 76. Production Graph As it is seen in the figure 76, level of production of the firms are different but if we look at the lines behaviours G.E. and Microsoft is very similar and Intel and other two firms is similar but not much as the relation between G.E. and Microsoft. 3. Control Charts Control charts can be use to test the suitability of the forecasting methods that applied to firms. 3.1. Naive Forecast Intel

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Figure 77. Data that will be used in control chart

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Figure 78. Control Chart RMSE value of Naive method is 1,98 according to first 69 days. But the last 20 days forecast do not fit in the UCL and LCL because of unsuitable values of naive forecast. Only the first two values fit in the chart and other 18 do not. As it seen in figure 78, for the last 18 value error amount is higly increasing. So, it can be said that Naive Method is not a good method to forecast. 3.2.1 Moving Average, N=20

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Figure 79. Data that will be used in control chart Figure

Figure 80. Control Chart The borders of control limits are extensive and forecast values is suitable to it. So, it can be said that moving average is a good method with N=20. Ens 208, Fall 2006 Project 01 Emre Eryılmaz 54

3.2.2 Moving Average, N=10

Figure 81. Data that will be used in control chart Figure

Figure 82. Control Chart Ens 208, Fall 2006 Project 01 Emre Eryılmaz 55

It is seen that there is 3 dots outside the limits when the changes are relatively high. But 17 dots is in the borders so, it can be said that N=10 provide quite well but not much as N=20. 3.2.3. N=5

Figure 83. Data that will be used in control chart Figure

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Figure 84. Control Chart

All the dots are in the borders, so it can be said that moving average with N=5 is doing well. 3.3. Weighted moving Average

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Figure 85. Data that will be used in control chart

Figure 86. Control Chart All the dots are between the range of control bars, so it can be said that weighted moving average is suitable to forecast.

3.4. Exponential Smoothing

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Figure 87. Data that will be used in control chart

Figure 88. Control Chart

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All dots values are between upper and lower controls limits so, we can say exponential smoothing is doing well. 3.5. Holt’s Exponential Smoothing

Figure 89. Data that will be used in control chart

UCL

LCL

Figure90. Control Chart

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All dots calculated by exponential smoothing are in the range of control limits. So, we can say exponential smoothing doing well with Intel values.

3.7. Linear Regression

Figure 91. Data that will be used in control chart

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UCL

LCL

Figure92. Control Chart As it seen in figure 92 only one value is outside from the control levels. All values are negative so, we understand that linear regression forecasted less than actual values of Intel.

3.8. Winter’s Exponential Smoothing

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Figure 93. Data that will be used in control chart

Figure 94. Control Chart As it seen in the figure 94, 11 dots are outside the range of upper and lower limits. And these values are generally bigger values than UCL. So, it can be said that winter could not adjust itself tı forecast bigger actual values.

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3.9. General Observations ... 4. Correlation 4.1. General Information About the Graphs Correlation and r^2 values used are used to detect correlation. The relation between firms is correlation. Namely, we will determine is there relationship between firms or not. Correlation graphs show the relationship between firms. CORREL( ; ) formula is useful to find correlation value in Excel. In graphs there is are two values of “y”. First one is actual value and the second one is found by using “x”. If y values are closer to each other, it can be said that change in x cause some changes in y and we can say there are correlated. r^2 value is also determined by RSQ( ; ) command in Excel. Second type of graph is the production graph . It has two different closing values in y axis ad time scale in x axis. Because of this, it helps us examining is there a decrease or increase follow one firm to another. Is this provide us to understand the relation between two firms. 4.2. Intel Microsoft Correlation

Correlation r^2 0,211709 0,044821

Because of there is no big sharp changes in the actual values Moving average and weighted moving average forecasted well. There is a seasonality in a period of weeks but the values are close to each other.

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Figure 94. Correlation graph of Intel and Microsoft

Figure 95. Correlation graph of Microsoft and Intel

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As it seen in the graphs there is no strong relationship between Microsoft and Intel. So it can not be said that an increase in Microsoft do not directly cause an increase in Intel and vice versa. As it seen in the graph the correlation between them is very low that is 0,211709 that means there is no real relationship between them. Even if there is iit is really weak. And r^2 value is 0,044831 which is very far away from 1. It means there is almost %4 relationship between these firms. To sum up, according to these values it can be said that there is not a real correlation between these two firm.

Figure 96. Production graph of Microsoft and Intel As it seen in the production graph there is no strong correlation. For example, in the rectangle The value of microsoft decreasing and Intel is increasing. To sum up, if you look deeply in graps, it will be seen that there is no strong correlation between the actual values of these firms. 4.3. Intel G.E. Correlation

Correlation r^2 0,22276 0,049622

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Figure 97. Correlation graph of Intel and G.E.

Figure 98. Correlation graph of G.E and Intel

As seen in the graphs there is no strong relationship between two firms according to data we have examined. Increase or decrease in the value of one firm do not affect the other one

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directly. The reasons we said for the correlation between Intel and Microsoft is the same in here.

Figure 99. Production graph of G.E. and Intel

If we look at production function we can easily say there is no strong relationship between Intel and G.E. In the rectangle The actual values of G.E. increasing and Intel’s atual values are decreasing. Also there is no paralel vlues except from the beginning and end of the graph. Moreover, correlation value is 0,22276 that means there is no strong relationship and r^2 is 0,049622 that means %4 they are correlated. To sum up it can easily said thre is no real correlation between Intel and G.E. according to graphs and values. 4.4 Microsoft and G.E. Correlation

Correlation r^2 0,818482 0,669913

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Figure 100. Correlation between Microsoft and G.E.

Figure 101. Correlation between G.E. and Microsoft If we look at the values of the two graphs detailly, it is obviously seen there is a correlation between these two firms. The values of the firms increasing and decreasing paralelly. We can say that if one of the value of one firm decrease or increase, the othar one will ce affected paralelly and its values will decrease or increase according to other firm. Also, correlatian and Ens 208, Fall 2006 Project 01 Emre Eryılmaz 69

r^2 values illustrase this technically. The correlation value is 0,818482 which shows there is a high correlation between these two firms. Also r^2 is 0,669913 that means these firms are almost %65 correlated.

Figure 102. Production graph of G.E. and Intel If you look at the figure 102, it is easily seen that two firms values are behaving almost parallel. For example if you look at purple rectangular, you see that one of the firms actual values increasing and the other one too. Also, if you look at blue rectangular two firms’ actualvalues are decreasing. Becasuse of the correlation is not %100 percent, there is also some points that seem do not correlate such as the at the end of the time but we found that these firms are almost %65 correlated which is a high correlation ratio. 4.6. Conclusion It was shown that there is a strong correlation between G. E. and Microsoft. The reason might be that Microsoft higly uses G. E. products and these affects its closing prices accordin to G.E. . The opposite situation is also possible. The value of correlation is 0,818482 and r^2 is 0,669913 that illustrates the relationship. Surprisingly there is no high correlation between Intel and microsoft although they are both computer technology areas and the owner of the two firm is Bill Gates. We expected that Ens 208, Fall 2006 Project 01 Emre Eryılmaz 70

microsoft and intel will be highly correlated but it was not. The correlation value is 0,044831 and r^2 value is 0,211709 that is very small to become correlated.

PART B: SURVEY OF FORECASTING WITH NEURAL NETWORKS 3. Neural network Products To forecast better and to became more close to actual values, lots of software companies are trying to produce a neural network forecasting products. In my search i tried to some neural network forecasting products. These are NeuroSolutions5, Alyuda Forecaster, Neural Power, Easy NN Plus, Forecaster XL, Trading Solutions and Tiberius XL. I have chosen Alyuda forecaster and Easy NN Plus forecaster.

4.Program Tutorial Alyuda forecaster is a demo version and it does not allow you to forecast your datas. In the program they are examples that how Alyuda forecasts. Let’s do an example. After clicked on shortcut of the program a window opens.

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Then it asks to select mode.

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There is demo examples that is seen in the picture below.

We chosed Sales Forecasting to see how it calculates business application.

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If you want it also shows the details...

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The other product is Easy NN but when i used it it provide bad results. So i did not put it.

Appendix A Main resource of Naive Method is the previous forecasted value and previous actual value. The difference between the previous A(t) and A(t-1) real values and sum of the result with A(t). The general formula of Naive Method is F(t+1) = A(t) + (A(t)-A(t-1)). Althoug

the method is simple, the method is useful for stable series. Appendix B F(t+1)=(A(t)+A(t-1)+A(t-2)....+A(t-N))/N N is the number of values that we used in forecasting

Appendix C Firtly value of “N” determined. Weight contstant have to be between 0 and 1. Also sum of the weight contstants have to be 1. weights can be denoted with w1, w2, ..wn or a, b, c...n. Ens 208, Fall 2006 Project 01 Emre Eryılmaz 75

Formula is F(t)= w1*A(t-n)+w2*A(t-(n-1))+...+wn*(At-1) *Firstly, previous actual value is multiplyed. Appendix D In this method a constant is used to forecast better. Constant has t be between 0 and 1. the formula is: F(t)=F(t-1)+α(A(t-1)-F(t-1) Appendix E Here is T(t) values to put trend in forecasting. F(t+1)= αA(t)+(1-α)(F(t)-T(t)) T(t+1)=β(F(t+1)-F(t))+(1- β)T(t) H(t+m)=F(t+1)+T(t+1)

References: Yahoo Finance (2006) Stock Research Center / Histrocial Quotes. http://biz.yahoo.com/r/. Accessed on November 8, 2006.

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