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Economic Forecasting and Analysis Assignment #1 Song Li Schulich School of Business, York University

Apple Inc. ( AAPL ) Historical prices from Dec 2004 to June 2010 ( see attached appendix) 1. To interpret the AAPL historical price from Dec 2004 to June 2010, I have retrieved its monthly historical price records from Yahoo Finance. This sample with 67 selected monthly prices represents the general performance of the AAPL during this period. 118.55 is the mean value of 67 sample prices which is obtained by divide the total amount of the sample price by number 67. Standard Deviation of 61.40 indicates the unit of measurement for measuring distance and variation from the mean. Standard Deviation on the rate of return is the measure of the volatility of an investment. AAPL Standard Deviation on the rate of return is 0.117 from the mean of 0.038 which indicates a high volatility. The lowest stock price during this period is 32.20 and the highest price is 261.09. The lowest rate of return is minus 33% and highest rate of return is 24%. The mean return is 3.8%. Both sets of data do not follow perfect normal distribution. The stock price has positive skew which means that the mass of the distribution is concentrated on the left of the figure and the curved has been pulled to the right by several extremely large numbers in the right. The mean is bigger than the median. It means that the stock price is significantly higher in some years. The stock return has negative skew which means that the mass of distribution is concentrated on the right of the figure and the curved has been pulled to the left by several extremely low numbers in the left. The mean is smaller than the median. The stock had several really bad returns during these years. 95% Confidence interval for mean lie between 103.57 and 133.52 which means that with 95% confidence that the mean of the population ( population here refers to the stock price at any time during the indicated period) is between 103.57 and 133.52. Same concept can be applied to the confidence interval to the mean rate of return. There is 95% confidence level that the mean return of the stock at any point in time is between 0.99% and 6.75%. The box plot is used to display the distributional characteristics of the data. The stock price does not have any outliers. However the stock return has a few outliers which indicate that there are several significantly larger negative returns than the rest. Quartiles divide a set of data into four equal parts. Therefore Q1=67.96 means that 25% of the stock price will be less than 67.96 and Q3=168.21 means that 75% of the stock price will be less than 168.21. P value < 0.005 for stock price summary which shows that P is significantly less than 0.05, Ho needs to be rejected. It once again confirms that the data is not normally distributed.

Assignment #1

Hi stogr am of P r i ce

Normal 14 12 10 Fr equency 8 6 4 2 0

Mean StDev N 118.5 61.40 67

50

100 Price

150

200

250

S ummar y for P r i ce

A nderson-D arling N ormality Test A -S quared P -V alue < M ean S tDev V ariance S kew ness Kurtosis N M inimum 1st Q uartile M edian 3rd Q uartile M aximum 103.57 85.34 9 5 % C o n f id e nc e I n t e r v a l s

Mean Median 80 90 100 110 120 130 140

1.16 0.005 118.55 61.40 3770.33 0.540878 -0.650723 67 32.20 67.96 105.12 168.21 261.09 133.52 135.37 74.01

50

100

150

200

250

95% C onfidence Interv al for M ean 95% C onfidence Interv al for M edian 95% C onfidence Interv al for S tDev 52.48

Assignment #1

Descriptive Statistics: Price

Variable Price Variable Price N 67 N* 0 Mean 118.55 SE Mean 7.50 StDev 61.40 Minimum 32.20 Q1 67.96 Median 105.12 Q3 168.21

Maximum 261.09

A nderson-D arling N ormality Test A -S quared P -V alue M ean S tDev V ariance S kew ness Kurtosis N M inimum 1st Q uartile M edian 3rd Q uartile M aximum 0.009922 0.014398 9 5 % C o n f id e nc e I n t e r v a l s

Mean Median 0.00 0.02 0.04 0.06 0.08

0.66 0.081 0.038717 0.117132 0.013720 -0.83611 1.08264 66 -0.329558 -0.044046 0.058008 0.124339 0.237701 0.067512 0.081817 0.141400

-0.24

-0.12

-0.00

0.12

0.24

95% C onfidence Interv al for M ean 95% C onfidence Interv al for M edian 95% C onfidence Interv al for S tDev 0.100001

Variable return Variable return N 66 N* 0 Mean 0.0387 SE Mean 0.0144 StDev 0.1171 Minimum -0.3296 Q1 -0.0440 Median 0.0580 Q3 0.1244

Maximum 0.2377

Assignment #1

Ti me S er i es P l ot of P r i ce

250

200

Price

150

100

50

0 1 7 14 21 28 35 Index 42 49 56 63

The time series plot of the price shows some smooth upward trend since end of year 2004 to approximately end of year 2006. Since 2007 to end of year 2008 it has some significant peaks and valleys. Starting from 2009 onwards, it resumes a smooth upward trend again. However the plot in general shows an upward trend.

Assignment #1

2. This selected set of data has a very strong linear trend. The trend equation Yt = 26.56 + 2.71*t. The slope of this trend equation indicates that the stock prices are estimated to increase an average of 2.71 each month. As the following figure shows the straight-line trend fitted to the actual data with a reasonable MSD of 976.

Tr end Anal ysi s P l ot for P r i ce

Linear Trend Model Yt = 26.56 + 2.71*t 250 200 150 100 50 0 1 7 14 21 28 35 Index 42 49 56 63

Variable Actual Fits A ccuracy Measures MAPE 19.320 MAD 22.285 MSD 976.538

3. By analyzing the autocorrelation of stock price, I have noticed that the autocorrelations for the first four time lags are significantly different from zero and that the values then gradually drop to zero. The Q statistic for 10 time lag is 253.12, which is greater than the chi-square value 18.3 (the upper 0.05 point of a chi-square distribution with 10 degrees of freedom.) This result indicates the autocorrelation of the first 10 lag as a group are significantly different from zero. Based on this I can conclude that the data are highly autocorrelated and exhibit a fairly strong trend like behaviour. Since the trend is so overwhelming, it is very difficult to detect the seasonality. In order to test its seasonality, the series are differenced and the percentage return of each month stock price is calculated to remove the trend and to create a stationary series. As shown in the following, the autocorrelations at each lag are almost close to zero. The LBQ statistic for 10 lags is also relatively small, none of the autocorrelations falls out-side the corresponding confidence limits, so there is little evidence to suggest the differenced data are autocorrelated. Therefore the conclusion is, the stock return series shows no evidence of a trend. The data are random with no seasonality.

Pr ice

Assignment #1

(with 5% significance limits for the autocorrelations) 1.0 0.8 0.6 A ut ocor relat ion 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 Lag 6 7 8 9 10

Lag 1 2 3 4 5 6 7 8 9 10 ACF 0.914876 0.818941 0.717545 0.634952 0.570605 0.505797 0.432729 0.365107 0.295491 0.235950 T 7.49 4.10 2.93 2.31 1.93 1.62 1.34 1.10 0.87 0.69 LBQ 58.63 106.33 143.52 173.10 197.38 216.77 231.20 241.64 248.60 253.12

Assignment #1

(with 5% significance limits for the autocorrelations) 1.0 0.8 0.6 A ut ocor r elat ion 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 Lag 6 7 8 9 10

Lag 1 2 3 4 5 6 7 8 9 10 ACF 0.130771 0.068775 -0.080664 -0.122039 -0.044806 -0.117848 -0.068394 0.013994 -0.101782 0.050144 T 1.06 0.55 -0.64 -0.96 -0.35 -0.92 -0.53 0.11 -0.78 0.38 LBQ 1.18 1.51 1.98 3.05 3.20 4.24 4.60 4.61 5.43 5.63

Assignment #1

4. By comparing the following options (3 months MA, 10 months MA, and single exponential smoothing), I concluded that the single exponential smoothing model fits my data set the best with the lowest MSD. For the simple moving average, the smaller the number, the larger the weight given to recent periods. The larger the number, the smaller the weight given the more recent periods. Therefore the moving average of longer period (10MA) tends to smooth out the peaks and valleys of the curve and therefore is the one which deviates from my data set the most. The drawback of the moving average method is that it assigns an equal weight to each past value involved in the average. It is usually used when a series has stabilized and generally unchanged environment. It is not suitable for dealing with trend and seasonality. Exponential smoothing is often a good forecasting procedure when a non-random time series exhibits trending behaviour. It generates forecast by using all the observations and assigning weights that decline exponentially as the observations get older. In my analysis, the system chooses the optimized Alpha, the smoothing constant, at 1.12. Alpha is a weighting factor that determines the extent to which the current observation influences the forecast of the next observation. Alpha 1.12 means that 120% of weighting is assigned towards the most current observation. That explains why the exponential smoothing follows the data sets more closely because todays stock price is more influenced by the most recent stock price than the price in older time period.

Assignment #1

10

M ov i ng Av er age P l ot for P r i ce

250

Variable Actual Fits Mov ing A v erage Length 3 A ccuracy Measures MAPE 14.083 MAD 17.078 MSD 499.905

200

Price

150

100

50

0 1 7 14 21 28 35 Index 42 49 56 63

250

Variable A ctual Fits Mov ing Av erage Length 10 A ccuracy Measures MAPE 24.00 MAD 31.62 MSD 1458.71

200

Pr ice

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100

50

0 1 7 14 21 28 35 Index 42 49 56 63

Assignment #1

11

S moothi ng P l ot for P r i ce

Single Exponential Method 250 200 150 100 50 0 1 7 14 21 28 35 Index 42 49 56 63

Variable Actual Fits Smoothing C onstant Alpha 1.12563 A ccuracy Measures MAPE 9.571 MAD 10.920 MSD 252.328

Data Price Length 67 Smoothing Constant Alpha 1.12563 Accuracy Measures MAPE 9.571 MAD 10.920 MSD 252.328

-----------------------------------------------------------------------------------( Notes: the following drawing and descriptive data are optional and for additional reference only.)

Pr ice

Assignment #1

12

S moothi ng P l ot for P r i ce

Double Exponential Method 300 250 200 Pr ice 150 100 50 0 1 7 14 21 28 35 Index 42 49 56 63

Variable A ctual Fits Smoothing C onstants Alpha (lev el) 1.12033 Gamma (trend) 0.03385 A ccuracy Measures MAPE 9.688 MAD 10.555 MSD 254.398

Data Price Length 67 Smoothing Constants Alpha (level) 1.12033 Gamma (trend) 0.03385 Accuracy Measures MAPE 9.688 MAD 10.555 MSD 254.398

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