METHODS OF FORECASTING

Multiple Regression Analysis: Used when two or more independent factors are
involved-widely used for intermediate term forecasting. Used to assess which factors to
include and which to exclude. Can be used to develop alternate models with different
factors.

Nonlinear Regression: Does not assume a linear relationship between variables-

frequently used when time is the independent variable.

Trend Analysis: Uses linear and nonlinear regression with time as the explanatory
variable-used where pattern over time.

Decomposition Analysis: Used to identify several patterns that appear simultaneously

in a time series-time consuming each time it is used-also used to deseasonalize a series

Moving Average Analysis: Simple Moving Averages-forecasts future values based on a

weighted average of past values-easy to update.

Weighted Moving Averages: Very powerful and economical. They are widely used
where repeated forecasts required-uses methods like sum-of-the-digits and trend
adjustment methods.

Adaptive Filtering: A type of moving average which includes a method of learning from
past errors-can respond to changes in the relative importance of trend, seasonal, and
random factors.

Exponential Smoothing: A moving average form of time series forecasting-efficient to

use with seasonal patterns- easy to adjust for past errors-easy to prepare follow-on
forecasts-ideal for situations where many forecasts must be prepared-several different
forms are used depending on presence of trend or cyclical variations.

Hodrick-Prescott Filter: This is a smoothing mechanism used to obtain a long term

trend component in a time series. It is a way to decompose a given series into stationary
and nonstationary components in such a way that there sum of squares of the series
from the nonstationary component is minimum with a penalty on changes to the
derivatives of the nonstationary component.
Month Reported Net Profit( cr.)
1 873.71
2 1,022.57
3 657.15
4 670.9

(forcasted
5 768.649381 )
(forcasted
6 701.3811404 )
(forcasted
7 713.4384361 )
(forcasted
8 727.9469024 )

Through using FORECAST(B5,B3:B5,B2:B4)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.848952
R Square 0.720719
Adjusted R
Square 0.441437
Standard Error 154.7955
Observations 3

ANOVA

  df SS

Regression 1 61835.89

Residual 1 23961.65
Total 2 85797.54

Standard
  Coefficients Error

Intercept 1311.045 340.3155

1 -175.835 109.457

RESIDUAL OUTPUT

Predicted
Observation 873.71 Residuals
1 959.375 63.195
2 783.54 -126.39
3 607.705 63.195

Demand 1311.045-(-175.835)*(month)
1200

1000
f(x) = − 97.39 x + 1049.55
R² = 0.52
800
Month
600 Reported Net Profit( cr.)
Linear (Reported Net
Profit( cr.))
400

200

0
1 2 3 4

Regression line

1200

1000

800
Month
Reported Net Profit( cr.)
600 Moving average (Reported
Net Profit( cr.))
Moving average (Reported
400 Net Profit( cr.))

200

0
1 2 3 4 5

Moving average Trendline