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forecasting

Chapters 1&2

Business Forecasting

Business decisions always depends on

some forecast about the course of an

event. The sales forecast is the root

forecast from which other forecasts like

employment, etc. forecast is derived.

The need for personnel with forecasting is

growing . Many companies now have a

forecasting departments with large group

of trained staff.

2

Forecasting

The forecasting need is not limited to

private companies and forecast of

sales, in other sections of economy

and science people make decisions

based on forecasts like forecast of

migrations to a state, forecast of

homicides, drug use, housing starts,

etc.

3

Forecasting

Although quantitative forecasting is a

complicated job, the use of computer

packages makes it possible and easy.

1. specifying objectives

2. Determining what to forecast.

3. Identifying time dimension.

4. Data consideration

5. Model selection

6. Model evaluation

7. Forecast preparation

8.Tracking the results.

5

Pattern

The data that are used most often in

forecasting is time series.

Time series data can show a variety

of patterns:

Trend

Seasonal

Cyclical

Irregular

6

selection

Smoothing models

Best used for the short-term forecasts

when there is seasonality or trend.

Trend regressions.

Causal Regression Model

Best used for models with cyclical

movements, trends.

Time-series Models

7

A Statistical Review

We need to forecast when future

outcome can happen with different

probabilities.

Dealing with probabilities, the first

thing that we are interested to know is

the what is the central tendency of the

distribution.

The Three most measures of the central

tendency are mean, median, mode.

8

The mean is the arithmetic average.

The median is the value that splits

the responses into two equal parts

when they are arrayed form the

smallest to largest.

The mode is the response that occurs

most frequently.

Normal distribution

In addition to information about

central tendency, we would like to

know how the observations are

distributed around the mean.

For the purpose of forecasting we

usually concentrate on two

distributions: normal and T

distribution.

10

Normal Distribution

Is symmetric around the mean. It has the

following important properties,

The area between one standard deviation from

the mean is 68%.

The area between two standard deviations

from the mean is 95%.

The area between three standard deviation

from the mean is 99%.

11

Standard Normal

Distribution

Suppose we know Mean= = 50, = 10,

we want to know what is the probability

that sales is between 35 and 60.

X

Z

Z= (35-50)/10 = -1.5

Z= (60-50)/10 =

1

Probability =0.4332+0.3413= 0.7745

12

Sample mean

Suppose we take a sample and its mean is

250.

We would like to test if the population mean

can be 280.

First we change the value

to standard

X

Z

/ n

normal

N=100, = 50,

=250

13

Hypothesis testing

250 in year. The population standard deviation is 100. Test

the hypothesis that the population mean is 280 at 5% level

of significance.

Z = (250-280)/(50/10)= -6

Rejection area 1.96, -1.96

We reject the null that the

mean is 250

14

tests

Two sided tests

Null: X= a

Alter: X a

The significance level will be divided by 2

Null: X>= a

Alter: X< a

The significance level will be on one side

15

Type one error = possibility of

rejecting the null when null is correct

Type two error: possibility of

accepting the null when null is

wrong.

16

T distribution

When population standard deviation is

unknown we use t distribution.

X

s/ n

17

Example

ACC corporation produces a popular PC clone .

The sales manager for ACC has recently read a

report that indicated that sales per salesperson

for other producers are normally distributed with

a mean of $255000. she is interested in knowing

whether her sales stall is comparable. She picked

a random sample of 16 salespeople and obtained

the following results

Microsoft Excel

Worksheet

18

What is the type one error in the

previous example?

What is the type two error in the

previous example?

Which one should be minimized?

19

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