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©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Lesson 12

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Define the components of a time series Compute moving average Determine a linear trend equation Compute a trend equation for a nonlinear trend Use a trend equation to forecast future time periods and to develop seasonally adjusted forecasts Determine and interpret a set of seasonal indexes Deseasonalize data using a seasonal index Test for autocorrelation 2

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What is a time series? ◦ a collection of data recorded over a period of time (weekly, monthly, quarterly) ◦ an analysis of history, it can be used by management to make current decisions and plans based on long- term forecasting ◦ Usually assumes past pattern to continue into the future 3

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Secular Trend – the smooth long term direction of a time series Cyclical Variation – the rise and fall of a time series over periods longer than one year Seasonal Variation – Patterns of change in a time series within a year which tends to repeat each year Irregular Variation – classified into: Episodic – unpredictable but identifiable Residual – also called chance fluctuation and unidentifiable 4

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8 Sales Time Seasonality Trend Line Cycle Irregular component

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Useful in smoothing time series to see its trend Basic method used in measuring seasonal fluctuation Applicable when time series follows fairly linear trend that have definite rhythmic pattern 9

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uses a 3-period moving average to smoothing time series to see its trend Week Sales Week Sales 1 110 6 120 2 115 7 130 3 125 8 115 4 120 9 110 5 125 10 130 Example: Rosco Drugs

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13 Three-year and Five-Year Moving Averages

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A simple moving average assigns the same weight to each observation in averaging Weighted moving average assigns different weights to each observation Most recent observation receives the most weight, and the weight decreases for older data values In either case, the sum of the weights = 1 14

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Cedar Fair operates seven amusement parks and five separately gated water parks. Its combined attendance (in thousands) for the last 12 years is given in the following table. A partner asks you to study the trend in attendance. Compute a three-year moving average and a three-year weighted moving average with weights of 0.2, 0.3, and 0.5 for successive years. 15

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The long term trend of many business series often approximates a straight line 17

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Use the least squares method in Simple Linear Regression (Chapter 13) to find the best linear relationship between 2 variables Code time (t) and use it as the independent variable E.g. let t be 1 for the first year, 2 for the second, and so on (if data are annual) 19

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20 Year Sales ($ mil.) 20027 200310 20049 200511 200613 Yeart Sales ($ mil.) 200217 2003210 200439 2005411 2006513 The sales of Jensen Foods, a small grocery chain located in southwest Texas, since 2002 are: Linear Trend – Using the Least Squares Method: An Example

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Linear Trend – Using the Least Squares Method: An Example Using Excel

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What is the forecasted sales for the year 2007?

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A linear trend equation is used when the data are increasing (or decreasing) by equal amounts A nonlinear trend equation is used when the data are increasing (or decreasing) by increasing amounts over time When data increase (or decrease) by equal percents or proportions plot will show curvilinear pattern 23

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24 Top graph is plot of the original data Bottom graph is the log base 10 of the original data which now is linear (Excel function: =log(x) or log(x,10) Using Data Analysis in Excel, generate the linear equation Regression output shown in next slide Log Trend Equation – Gulf Shores Importers Example

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End of Lesson 12 Refer to textbook Chapter 16 28

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