Month | Price per Chip | Month | Price per Chip |
---|---|---|---|
January | $1.80 | July | 1.80 |
February | 1.67 | August | 1.83 |
March | 1.70 | September | 1.70 |
April | 1.85 | October | 1.65 |
May | 1.90 | November | 1.70 |
June | 1.87 | December | 1.75 |
Use a 3-month moving average and add the 3-month plot to the graph created in part (a).
Which is better (using the mean absolute deviation): the 2-month average or the 3-month average?
Compute the forecasts for each month using exponential smoothing, with an initial forecast for January of $1.80. Use α = .1, then α = .3, and finally α = .5. Using MAD, which a is the best?
a. 3 months moving average:
It is calculated as Simple Moving Average (SMA) for n month = Average of (n, n-1, n-2) months
Excel formulation
Graph for Price per Chip and 3 months moving average
b. MAD for 2 & 3 months moving average:
Based on the approach discussed in 3 month SMA, 2 month SMA & respective MAD is calculated
Excel Formulation
MAD for 2 months SMA (0.047) is lower than 3 months SMA (0.058).
So, 2 months SMA is better option.
c. Exponential Smoothening:
This method gives higher weightage to latest value and decreases weightage exponentially as we move older values.
Forecast (n month) = a * (n-1) + (1-a) * (n-1)
Excel formulation
Based on above table values,
MAD for a = 0.1 is lowest among three. Hence 0.1 is the best value for a.
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Month Price per Chip Month Price per Chip January $1.80 July 1.80 February 1.67 August 1.83...
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