Lesson 1

Forecasting and Inventory Control

February 2014

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1 Questions
1. Proof that the first difference of a random walk is a stationary process.
Let {Xt } be a random walk process and let {wt } be white noise.

Xt = Xt−1 + wt

2. Let {wt } be a sequence of independent normal random variables, each

with mean 0 and variance σ 2 and let a, b, and c be constants. Is the
following process stationary? Specify the mean and autocovariance
function.(4 marks)

Xt = a + bwt + cwt−2

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3. You have plotted the PACF and ACF of your data and they are the
following:

Which model would you might fit to your data? (4 marks)

4. The following two correlograms are for two different sets of time series
observations, each belong to a product.

You decide to fit moving average models (MA(q)) to each set (why?).
What order q would you suggest for each of the two models? (4marks)

5. Take the first difference of the Assignment 2 sales dataset, plot the new
time series and write your observations about the trend. (4marks)