Question

2. Forecasts and actual Boeing (BA) stock prices for the past five days were: (24 pts) Forecasts: Mon $370, Tues $375, Wed $370, Thur $367, Frid $375; Actual: Mon $375, Tues $369, Wed $365, Thur $370, Fri $379. a. What is the MSE for the forecasting? b. What are the moving average forecasts for BA stock using k = 2? c. What are the moving average forecasts for BA stock using k = 3? d. Based on MSE value, considering these three forecasts, which one is the best?

Answer 1

Solution Question No.a

Mean Squared Error (MSE) is a method used to find out how close the regression line to a set of points. MSE measures the errors (distance) from the points to the regression line and squaring them to remove negative signs and to provide more mass to the difference which are large. Since the method finds the average of set of errors, the method is called Mean Squared Error. MSE method is commonly used to determine the closeness between the forecasted share price and the actual share price of the stock.

Days	Actual	Forecast	Error	Error Squared
1	375	370	5	25
2	369	375	-6	36
3	365	370	-5	25
4	370	367	3	9
5	379	375	4	16
			MSE	22.2

Solution Question No.b

Moving average forecast when k = 2

Days	Acual	Forecast (k=2)	Error	Error Squared
1	375
2	369	372	(3)	9.0
3	365	367	(2)	4.0
4	370	368	3	6.3
5	379	375	5	20.3
			MSE	9.875

Solution Question No.c

Moving average forecast when k = 3

Days	Actual	Forecast (k=3)	Error	Error Squared
1	375
2	369
3	365	370	(5)	22
4	370	368	2	4
5	379	371	8	59
			MSE	28

Solution Question No.d

The smallest the Mean Square Error (MSE), the closer the line of best fit. Therefore, the moving average forecast when K =2 shows the smallest mean error (MSE 9.875).

The forecasting of share prices using the two days moving average will be the best forecast that is close to the reality.