BUSINESS QUANTITATIVE ANALYSIS

Lecture Sheet
Forecasting – Time Series
Duration: October 2022 – January 2023

Instructor
Md. Sajjad Hossain
CMA (1800 passed), MBA, BBA, LLB, PGDCSE
Lawyer – Taxes Appellate Tribunal
Member – Dhaka Taxes Bar Association
Proprietor – S Hossain & Co.
Tax, VAT and Company Law Advisor
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 TABLE OF CONTENTS

Particulars Page No.

1. Chapter title 02

2. Forecasting – Time series 03

3. Problems and Solutions 08

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 CHAPTER TITLE

Part A - Business Mathematics

1. Set theory

2. Logarithm functions

3. Permutations and combinations

4. Mathematics of finance

Part B - Business Statistics

5. Descriptive statistics

6. Correlation and regression

7. Probability

8. Forecasting – Time series

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 CHAPTER - 8
FORECASTING – TIME SERIES

8.1. DEFINITION OF FORECASTING

Forecasting is the process of making predictions of the future based on past and
present data and most commonly by analysis of trends. A commonplace example
might be estimation of some variable of interest at some specified future date.
Prediction is a similar, but more general term.

8.2. ROLE OF FORECASTING

Forecasting plays an important role in various fields of the concern. As in the case of
production planning, management has to decide what to produce and with what
resources. Thus forecasting is considered as the indispensable component of
business, because it helps management to take correct decisions. Forecasting plays
an important role in the following cases.

(i) Promotion of new business:

Forecasting is of utmost importance in setting up a new business. It is not an easy
task to start a new business as it is full of uncertainties and risks. With the help of
forecasting the promoter can find out whether he can succeed in the new business.

(ii) Estimation of financial requirements:

The importance of forecasting can’t be ignored in estimating the financial
requirements of a concern. Efficient utilisation of capital is a delicate issue before
the management. No business can survive without adequate capital. But adequacy of
either fixed or working capital depends entirely on sound financial forecasting.

(iii) Smooth and continuous working of a concern:

Forecasting of earnings ensures smooth and continuous working of an enterprise,
particularly to newly established ones. By forecasting, these concerns can estimate
their expected profits or losses. The object of a forecast is to reduce in black and
white the details of working of a concern.

(iv) Success in business:

The accurate forecasting of sales helps to procure necessary raw materials on the
basis of which many business activities are undertaken. The accurate sales
forecasting becomes the basis for several other budgets. In the absence of accurate
sales forecasting, it is difficult to decide as to how much production should be done.

(v) Co-Operation and co-ordination:

Forecasting is not one man’s job. It needs proper co-ordination of all departmental
heads in a company. Thus, by bringing participation of all concerned in the process
of forecasting, team spirit and coordination is automatically encouraged.

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8.3. STEPS OF FORECASTING

A forecasting task usually involves five basic steps.

Step 1: Problem definition:

Often this is the most difficult part of forecasting. Defining the problem carefully
requires an understanding of the way the forecasts will be used, who requires the
forecasts, and how the forecasting function fits within the organization requiring the
forecasts. A forecaster needs to spend time talking to everyone who will be involved
in collecting data, maintaining databases, and using the forecasts for future planning.

Step 2: Gathering information:

There are always at least two kinds of information required: (a) statistical data, and
(b) the accumulated expertise of the people who collect the data and use the
forecasts. Often, it will be difficult to obtain enough historical data to be able to fit a
good statistical model. However, occasionally, very old data will be less useful due
to changes in the system being forecast.

Step 3: Preliminary (exploratory) analysis:

Always start by graphing the data. Are there consistent patterns? Is there a
significant trend? Is seasonality important? Is there evidence of the presence of
business cycles? Are there any outliers in the data that need to be explained by those
with expert knowledge? How strong are the relationships among the variables
available for analysis? Various tools have been developed to help with this analysis.

Step 4: Choosing and fitting models:

The best model to use depends on the availability of historical data, the strength of
relationships between the forecast variable and any explanatory variables, and the
way the forecasts are to be used. It is common to compare two or three potential
models. Each model is itself an artificial construct that is based on a set of
assumptions (explicit and implicit) and usually involves one or more parameters
which must be "fitted" using the known historical data.

Step 5: Using and evaluating a forecasting model:

Once a model has been selected and its parameters estimated, the model is used to
make forecasts. The performance of the model can only be properly evaluated after
the data for the forecast period have become available. A number of methods have
been developed to help in assessing the accuracy of forecasts. There are also
organizational issues in using and acting on the forecasts.

8.4. DIFFERENT METHODS OF FORECASTING

(i) Moving average:

Among the most popular technical indicators, moving averages are used to gauge the
direction of the current trend. Every type of moving average is a mathematical result
that is calculated by averaging a number of past data points. Once determined, the

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resulting average is then plotted onto a chart in order to allow traders to look at
smoothed data rather than focusing on the day-to-day price fluctuations that are
inherent in all financial markets.

(ii) Time series analysis:

Time series analysis comprises methods for analyzing time series data in order to
extract meaningful statistics and other characteristics of the data. Time
series methods take into account possible internal structure in the data. Time
series data often arise when monitoring industrial processes or tracking corporate
business metrics.

(iii) Regression analysis:

Regression analysis is a process for estimating the relationships among variables. It
includes many techniques for modeling and analyzing several variables, when the
focus is on the relationship between a dependent variable and one or more
independent variables.

(iv) Exponential smoothing:

Exponential smoothing is a rule of thumb technique for smoothing time series data,
particularly for recursively applying as many as three low-pass filters
with exponential window functions. Such techniques have broad application that is
not intended to be strictly accurate or reliable for every situation.

8.5. LIMITATIONS OF FORECASTING MODEL

Internal limitations:
When looking at internal limitations of forecasting, the obvious one is time. It takes
time to make a good forecast. Most small businesses can’t afford a full time
employee to create and manage the annual forecast, so it becomes a part of
someone’s overall responsibility. It’s critical that whoever is charged with creating
the forecast understands how important this activity is and not look at it as just extra
work to get through. Another internal limitation may be lack of historical data.
Forecasting starts with the accumulation of past data and then builds from there. It’s
critical that historical records be maintained in such a way that they can be easily
used as a part of the forecasting process.

External limitations:
The external limitations to forecasting provide the real challenge in creating a good
forecast. You can control your pricing, your promotional level of activity and your
distribution methods, which all influence the demand for your products. What you
can’t control are the entry or exit of competitors, competitive promotional activity,
factors such as new technology that affect the natural demand for your products,
dramatic weather events, new laws or regulations or loss of key existing customers.
While you can’t control those events, you must at least be aware of them and make
reasonable assumptions about some of them and factor those into the forecast.

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8.6. DEFINITION OF TIME SERIES NALYSIS

Time series analysis is a specific way of analyzing a sequence of data points

collected over an interval of time. In time series analysis, analysts record data points
at consistent intervals over a set period of time rather than just recording the data
points intermittently or randomly. However, this type of analysis is not merely the
act of collecting data over time. What sets time series data apart from other data is
that the analysis can show how variables change over time. In other words, time
series is a crucial variable because it shows how the data adjusts over the course of
the data points as well as the final results. It provides an additional source of
information and a set order of dependencies between the data.

8.7. WHY ORGANIZATIONS USE TIME SERIES ANALYSIS

Time series analysis helps organizations understand the underlying causes of trends
or systemic patterns over time. Using data visualizations, business users can see
seasonal trends and dig deeper into why these trends occur. With modern analytics
platforms, these visualizations can go far beyond line graphs. When organizations
analyze data over consistent intervals, they can also use time series forecasting to
predict the likelihood of future events. Time series forecasting is part of predictive
analytics. It can show likely changes in the data, like seasonality or cyclic behavior,
which provides a better understanding of data variables and helps forecast better. For
example, Des Moines Public Schools analyzed five years of student achievement
data to identify at-risk students and track progress over time. Today’s technology
allows us to collect massive amounts of data every day and it’s easier than ever to
gather enough consistent data for comprehensive analysis.

8.8. WHEN TIME SERIES ANALYSIS IS USED AND WHEN IT ISN’T

We have been using time series analysis for thousands of years, all the way back to
the ancient studies of planetary movement and navigation. Time series analysis is
used for non-stationary data—things that are constantly fluctuating over time or are
affected by time. Industries like finance, retail, and economics frequently use time
series analysis because currency and sales are always changing. Stock market
analysis is an excellent example of time series analysis in action, especially with
automated trading algorithms. Likewise, time series analysis is ideal for forecasting
weather changes, helping meteorologists predict everything from tomorrow’s
weather report to future years of climate change. Examples of time series analysis in
action include:
• Weather data
• Rainfall measurements
• Temperature readings
• Heart rate monitoring (EKG)
• Brain monitoring (EEG)
• Quarterly sales
• Stock prices
• Industry forecasts

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Because time series analysis includes many categories or variations of data, analysts
sometimes must make complex models. However, analysts can’t account for all
variances, and they can’t generalize a specific model to every sample. Models that
are too complex or that try to do too many things can lead to lack of fit. Lack of fit
or overfitting models lead to those models not distinguishing between random error
and true relationships, leaving analysis skewed and forecasts incorrect.

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PROBLEMS AND SOLUTIONS

P-1. The time series given below shows the tables sold by a small company since it
started:

Years 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Tables sold 42 50 61 75 92 111 120 127 140 138

Find the linear equation that describes the trend in the number of tables sold. Also
estimate the sales of tables in 2005.
CMA Adapted – June 2020
Solution:

Years Tables Taking Multiplying X2 XY

sold deviation deviations
(Y) from 1998.5 by 2 (X)
1994 42 -4.5 -9 81 -378
1995 50 -3.5 -7 49 -350
1996 61 -2.5 -5 25 -305
1997 75 -1.5 -3 9 -225
1998 92 -0.5 -1 1 -92
1999 111 0.5 1 1 111
2000 120 1.5 3 9 360
2001 127 2.5 5 25 635
2002 140 3.5 7 49 980
2003 138 4.5 9 81 1,242
N = 10 ∑Y = 956 ∑X = 0 ∑X2 = 330 ∑XY = 1,978

The linear equation, Y = a + bX

Here,

a=
Y
N
956
=
10
= 95.60

b=
 XY
X 2

1,978
=
330
= 5.99

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Therefore,
The linear equation, Y = 95.60 + 5.99X

The sales of tables in 2005 = 95.60 + 5.99 x 13

= 95.60 + 77.87
= 173.47

P-2. Below are given figures of production (in thousand quintals) of a sugar factory.

Year 1976 1977 1978 1979 1980 1981 1982

Production (in quintals) 77 88 94 85 91 98 90

Required:
(a) Fit a straight line by the least squares method, and tabulate the trend values.
(b) Eliminate the trend, what components of the time series are thus left over?
(c) What is the monthly increase in the production of sugar?

Solution:

(a)

Year Production Taking X2 XY Trend

in quintals deviation from values
(Y) 1979 (X) (Yc)
1976 77 -3 9 -231 83
1977 88 -2 4 -176 85
1978 94 -1 1 -94 87
1979 85 0 0 0 89
1980 91 1 1 91 91
1981 98 2 4 196 93
1982 90 3 9 270 95
2
N=7 ∑Y = 623 ∑X = 0 ∑X = 28 ∑XY = 56 ∑Yc = 623

The straight line equation is,

Y = a + bX

Here,

a=
Y
N
623
=
7
= 89

9
b=
 XY
X 2

56
=
28
=2

Y = 89 + 2X

Determination of trend values:

Y1976 = 89 + 2 x (-3)
= 89 - 6
= 83

Y1977 = 89 + 2 x (-2)
= 89 - 4
= 85

Y1978 = 89 + 2 x (-1)
= 89 - 2
= 87

Y1979 = 89 + 2 x (0)
= 89 + 0
= 89

Y1980 = 89 + 2 x 1
= 89 + 2
= 91

Y1981 = 89 + 2 x 2
= 89 + 4
= 93

Y1982 = 89 + 2 x 3
= 89 + 6
= 95

(b) Seasonal, cyclical and irregular variations are thus left over after eliminating the
trend.
b
(c) Monthly increase in the production =
12
2
=
12
= 0.17

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P-3. Fit a straight line trend by the method of least squares to the following data:

Year 2008 2009 2010 2011 2012

Production of sheet 12 10 14 11 13

Solution:

Year Production Taking deviation X2 XY

(Y) from 2010 (X)
2008 12 -2 4 -24
2009 10 -1 1 -10
2010 14 0 0 0
2011 11 1 1 11
2012 13 2 4 26
2
N=5 ∑Y = 60 ∑X = 0 ∑X = 10 ∑XY = 3

The equation of straight line trend is,

Y = a + bX

Here,

a=
Y
N
60
=
5
= 12

b=
 XY
X 2

3
=
10
= 0.30

The equation of straight line trend is,

Y = 12 + 0.30X

P-4. A West Coast Publishing Company keeps accurate records of its monthly
expenditure for advertising and its total monthly sales. For the first ten months of
2017, the records showed the following (note that units are in taka):

Advertising (in thousands) 43 44 36 38 47 40 41 54 37 46

Sales (in millions) 74 76 60 68 79 70 71 94 65 78

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Required:
(a) Find the least-squares prediction equation appropriate for the data.
(b) If the company plans to spend Tk.80,000 for advertising next month, what is
their predicted sale? (Assume that all other factors can be neglected).

Solution:

(a)

Advertising in Sales in millions X2 XY

thousands (X) (Y)
43 74 1,849 3,182
44 76 1,936 3,344
36 60 1,296 2,160
38 68 1,444 2,584
47 79 2,209 3,713
40 70 1,600 2,800
41 71 1,681 2,911
54 94 2,916 5,076
37 65 1,369 2,405
46 78 2,116 3,588
∑X = 426 ∑Y = 735 ∑X2 = 18,416 ∑XY = 31,763

The least-squares prediction equation is,

Y = a + bX

Here,

a=
Y
N
735
=
10
= 73.50

b=
 XY
X 2

31,763
=
18,416
= 1.72

The least-squares prediction equation is,

Y = 73.50 + 1.72X

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(b) Predicted sale = 73.50 + 1.72 x 80
= 73.50 + 137.60
= 211 million

P-5. Fit a straight line trend by the method of least squares to the following data:

Year 2008 2009 2010 2011 2012 2013 2014

Production of steel 12 10 14 11 13 15 16

Solution:

Year Production Taking deviation X2 XY

(Y) from 2011 (X)
2008 12 -3 9 -36
2009 10 -2 4 -20
2010 14 -1 1 -14
2011 11 0 0 0
2012 13 1 1 13
2013 15 2 4 30
2014 16 3 9 48
2
N=7 ∑Y = 91 ∑X = 0 ∑X = 28 ∑XY = 21

The straight line trend, Y = a + bX

Here,

a=
Y
N
91
=
7
= 13

b=
 XY
X 2

21
=
28
= 0.75

The straight line trend, Y = 13 + 0.75 x

P-6. Calculate the trend value by the method of least-squares from the data given
below and estimate the sales for the year 2017-2018:

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 Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
Sales of TV 12 18 20 23 27
sets (in lakh)

Solution:

Year Sales in lakh Taking deviation X2 XY

(Y) from 2011-2012 (X)
2009-2010 12 -2 4 -24
2010-2011 18 -1 1 -18
2011-2012 20 0 0 0
2012-2013 23 1 1 23
2013-2014 27 2 4 54
N=5 ∑Y = 100 ∑X = 0 ∑X2 = 10 ∑XY = 35

The equation of trend line is,

Y = a + bX

Here,

a=
Y
N
100
=
5
= 20

b=
 XY
X 2

35
=
10
= 3.5

Y = 20 + 3.5X

Estimation of trend values:

Y2009-2010 = 20 + 3.5 x (-2)

= 20 - 7
= 13

Y2010-2011 = 20 + 3.5 x (-1)

= 20 – 3.5
= 16.5

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Y2011-2012 = 20 + 3.5 x 0
= 20 + 0
= 20

Y2012-2013 = 20 + 3.5 x 1
= 20 + 3.5
= 23.5

Y2013-2014 = 20 + 3.5 x 2
= 20 + 7
= 27

Estimation of sales for the year 2017-2018:

Y2017-2018 = 20 + 3.5 x 6
= 20 + 21
= 41

P-7. Fit a straight line trend by the method of least-squares.

Years 2007 2008 2009 2010 2011 2012 2013

Profits (in millions) 101 100 105 112 114 120 124

Solution:

Years Profits in Taking deviation X2 XY

millions (Y) from 2010 (X)
2007 101 -3 9 -303
2008 100 -2 4 -200
2009 105 -1 1 -105
2010 112 0 0 0
2011 114 1 1 114
2012 120 2 4 240
2013 124 3 9 372
2
N=7 ∑Y = 776 ∑X = 0 ∑X = 28 ∑XY = 118

The straight line trend, Y = a + bX

Here,

a=
Y
N
776
=
7
= 110.86

15
b=
 XY
X 2

118
=
28
= 4.21

Therefore,
The straight line trend, Y = 110.86 + 4.21X

P-8. Fit a straight line trend by the method of least-squares.

Years 2007 2008 2009 2010 2011 2012 2013 2014

Profits (millions) 101 100 105 112 114 120 124 134

Solution:

Years Profits in Taking Multiplying X2 XY

millions deviation deviations
(Y) from 2010.5 by 2 (X)
2007 101 -3.5 -7 49 -707
2008 100 -2.5 -5 25 -500
2009 105 -1.5 -3 9 -315
2010 112 -0.5 -1 1 -112
2011 114 0.5 1 1 114
2012 120 1.5 3 9 360
2013 124 2.5 5 25 620
2014 134 3.5 7 49 938
2
N=8 ∑Y = 910 ∑X = 0 ∑X = 168 ∑XY = 398

The straight line trend, Y = a + bX

Here,

a=
Y
N
910
=
8
= 113.75

b=
 XY
X 2

398
=
168
= 2.37

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Therefore,
The straight line trend, Y = 113.75 + 2.37X

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 QUESTION PATTERN

Part A - Business Mathematics

Type No. of questions Total marks

Multiple choice questions 10 10
Modified true/ false 10 10
Mathematical questions* 3 30
Total marks 50

*Each mathematical question may contain maximum two sub-questions.

Part B - Business Statistics

Type No. of questions Total marks

Multiple choice questions 10 10
Modified true/ false 10 10
Mathematical questions* 3 30
Total marks 50

*Each mathematical question may contain maximum two sub-questions.

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