A State University Credit Union handles saving accounts and makes loans to members. In order to plan its investment strategies, the credit union needs to forecast monthly loans requests. Monthly Loan requests in millions of dollars were recorded for the last two years and are presented in the data set at the last page. Answer the following questions:

Problem

1.Two models are suggested: (i) Exponential smoothing with alpha = 0.2 or (ii) Exponential smoothing with alpha = 0.6. Use the template and the MAPE criterion (you do not need to calculate anything by hand). Which model works better and why? Select the correct answer below (read the entire answer):

a.Expon. Smooth. with alpha = 0.2, because its MAPE is larger than its MSE, indicating a better performance.

b.Expon. Smooth. with alpha = 0.6 because the weight we give to the recent data is larger than this weight in the other model, indicating a better performance.

c.Expon. Smooth. with alpha = 0.2, because its MAPE= 8.6, while

MAPE of the other model is = 8.86, indicating a better performance.

d.Expon. Smooth with alpha = 0.2, for a reason not mentioned above.

2.Here you need to show your familiarity with the exponential smoothing forecast calculations, and the calculation of MAE. The first four data points were separated from the rest of the time series. Pretend this is now the only sample you have available (Y1 = 1.34, Y2 = 1.5, Y3 = 1.48, Y4 = 1.78).

(i)Show process of calculating F₃₊₁, F₄₊₁, andF₄₊₃ for the reduced time series of Y1, Y2, Y3, and Y4, using the Expon. Smooth. with alpha = 0.6

(ii)Show how you would calculate MAE for the reduced sample shown above when using the 3-period moving average forecasts you calculated in part (i).

3.Back to the entire data set. Since funding plans are made by the bank quarterly, a new funding plan is made to cover next quarter loans at the beginning of each quarter. It is now month t=24 and this is the end of a quarter. So, a new plan is made by the bank to cover the quarter that starts at t=25. How much money should be made available to cover all the forecast loan requests for next quarter? (recall, that the data values are the monthly demand for loans). Use the

exponential smoothing model with alpha 0.2 to obtain the correct answer below.

a. Calculate F(24+1) This is the amount the bank should make

available for the quarter.

b. Calculate the following forecasts:

F(24+1) = 0.2*Y24+0.8*F24;

F(25+1) = 0.2*Y24+0.8*F25;

F(26+1) = 0.2*Y24+0.8*F26

Now add the three forecasts to find the amount of funds that should be made

available for the quarter.

c.Calculate the following forecasts:

F(24+1) = 0.2*Y24+0.8*F24;

F(24+2) = 2*F(24+1);

F(24+3) = 3*F(24+1);

Now add the three forecasts to find the amount of funds that should be made

available for the quarter.

d. None of the above.

a.

This is the time series: Copy and paste the values into your template (you can copy all the column as one selection. Don't copy the 't' column)

1.34

1.5

1.48

1.78

1.59

1.5

1.42

1.85

1.77

1.52

1.42

1.41

1.58

1.31

1.55

1.39

1.45

1.74

1.68

1.38

1.45

1.43

1.43

1.48