OPERATIONS FORECASTING 2
June 25, 2018
Compare and contrast each quantitative forecast you develop
Quantitative forecasting is a statistical method that is used for future projections making use of mathematical facts and prior experience. The two primary methods of quantitative forecasting employed by businesses for predictions are the analytical technique which tries to correlate two or more variables and time series analysis technique which uses prior trends to make predictions (Robert Jacobs, F., Richard Chase, B., 2014). The three methods that I used to calculate the weekly forecast for the stock price for Starbucks Corporation are simple moving average, exponential smoothing, and simple linear regression.
The simple moving average is based on the average of the past stock prices. In my case, I used a 3 – week simple moving average whereby the prior three weeks are averaged to find the forecast for the fourth week. Therefore, the estimates for the 24th week of the year, i.e., June 29, 2018 stock price is predicted to be $53.20. The simple moving average is easy to calculate since it only requires the averaging of the given periods. It also smooths out volatility hence making it easier to the trend of the stock price. A simple moving average is necessary for the analysis as it is used to identify price trends and the probability for any changes in the established pattern (Ahmad, M. I., Guohui, W., Rafiq, M. Y., Hasan, M., & Sattar, A., 2017). On the graph for simple moving average, the chart is downward sloping at the most recent week. Hence the prediction is most likely a downward trend.
Exponential smoothing, on the other hand, is like simple moving average except that it gives more weight to the most recent data. It is well suited for market trending (Bergmeir, C., Hyndman, R. J., & Benítez, J. M., 2016). The trend for the stock price for Starbucks Corp. is downward slopping at the most recent period. Hence the probable forecast is the downward price. Under exponential smoothing, the price forecast is $51.76. For risk-averse investors, the rate of change for the stock price is significant and is considered most unlike the exponential smoothing average. This method is mostly used in other ways to assert the considerable market movements and measure its validity.
The linear regression is a time-series analysis technique which employs basic statistics to forecast future values for a target variable. This method uses stock prices as the explanatory variable. It is mostly used when the time is not a component is the explanatory variable. This model fits a line to the stock price’s historical performance and then extrapolates it into the future. (Robert Jacobs, F., Richard Chase, B., 2014) This method is inept to account for seasonality or other cycles, as well as nonlinearity, but if the variable in question is plausibly linear, using linear regression to forecast it might yield a useful prediction. It is helpful since it necessary for causal models due to their ability to consider several different factors and evaluate the impact of each one. The stock price forecast under linear regression is $55.76.
Choose the one forecast you determine would be the best for the firm and be prepared to explain why you chose this
The method that I prefer to be used to forecast the stock prices for Starbucks Corporation is the exponential smoothing technique. This is because of the method factors in the most recent stock price, unlike the other methods. The method is accurate, easy to formulate and construct, simple to understand by the users of the model. In the construction of the model, no complicated and huge computations are required. Also, the availability of computer packages has made the method easy and quick to develop, and when the management wants to test for the accuracy of the process, this technique offers the computations (Robert Jacobs, F., Richard Chase, B., 2014). The only requirement to perform the forecast is the most recent forecast, the actual stock price for the estimates and the smoothing constant (α).
Evaluate the impact this forecast would have on the firm from a financial metrics standpoint
Forecasting provides necessary information for the management and the investors for the company to know the future behavior of the company’s stock price. Based on the forecast for the stock price of Starbucks Corporation, the management needs to work harder and improve the stock price. From the investor’s perspective, some may decide to sell their shares to avoid future losses. The management should aim at improving the stock price otherwise profits will reduce in the future if the trend persists.
References Ahmad, M. I., Guohui, W., Rafiq, M. Y., Hasan, M., & Sattar, A. (2017). Assesing Performance of Moving Average Investment Timing Strategy Over the UK Stock Market. The Journal of Developing Areas, 51(3), 349-362. Bergmeir, C., Hyndman, R. J., & Benítez, J. M. (2016). Bagging exponential smoothing methods using STL decomposition and Box–Cox transformation. International journal of forecasting, 32(2), 303-312. Robert Jacobs, F., Richard Chase, B. (2014). Operations and Supply Chain Management (14th ed.). New York, NY: McGraw-Hill/Irwin.