Linear Trend Lines Yt = b0 + b1 Xt Where Yt is the dependent variable being forecasted Xt is the independent variable being used to explain Y. In Linear Trend Lines, Xt is assumed to be t. b1 is the slope of the line, determined by Excel b0 is the y intercept of the line, determined by Excel Tools Data Analysis Regression Coefficient of Determination: R-square Proportion of variation in Y around its mean that is accounted for by the regression model 0 <= R2 <= 1 Will always increase as add more independent variables into regression model. Use adjusted R2 to compare when more than one independent variable is used Standard Error of the line: Se The standard deviation of estimation errors The measure of amount of scatter around the regression line Can be used as a rough rule of thumb for predicting level of accuracy. Excel’s Trend Function =trend(known y-range, known x-range, new x) Where known y-range are the cells that hold known values for the y variable Where known x-range are the cells that hold known values for the x variable Where new x is the cell or value for which the y variable is to be forecasted Stationary Seasonal Effects A d d itiv e S e a s o n a l E ffe c ts 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 18 19 20 21 22 23 24 25 T im e P e r io d M u ltip lic a tiv e S e a s o n a l E ffe c ts 1 2 3 4 5 6 7 8 9 10 11 12 13 14 T im e P e r io d 15 16 17 Text Use of Multiplicative Seasonal Indices (pg. 532) 1. 2. 3. 4. Create a trend model and calculate the estimated value for each observation Calculate the ratio of the actual value to the predicted value for each observation Use the average of the values for each seasonal period to compute the seasonal index Multiply any forecast produced by the trend model by the appropriate seasonal index Use Solver to Identify Seasonal Indices and Trendline 1. Program linear trendline formula for trend forecast, referring to input data cells for b0 and b1 2. 3. 4. Program seasonal adjustment formula, referring to input data cells for seasonal indices Program MAPE or MSE calculations Program Solver to Min MAPE/MSE By Changing seasonal indices, b0 and b1 Subject to average seasonal index = 100% and seasonal indices>=0 Forecasting periods 37 and 38 for the Vintage Case Y37 = 185.8 + .372*37 = 199.63 Seasonal forecast for 37 = seasonal index for 37 * Y37 =1.44* 199.63 = 288.4 Y38 = 185.8 + .372*38 = 200 Seasonal forecast for 38 = 1.29*200 = 259 Simple Linear Regression: Example You want to examine the linear dependency of the annual sales of produce stores on their size in square footage. Sample data for seven stores were obtained. Find the equation of the straight line that fits the data best. Store Square Feet Annual Sales ($1000) 1 2 3 4 5 6 7 1,726 1,542 2,816 5,555 1,292 2,208 1,313 3,681 3,395 6,653 9,543 3,318 5,563 3,760 Scatter Diagram: Example Annua l Sa le s ($000) 12000 10000 8000 6000 4000 2000 0 0 Excel Output 1000 2000 3000 4000 S q u a re F e e t 5000 6000 Equation for the Sample Regression Line: Example Yˆi b0 b1 X i 1636.415 1.487 X i From Excel Printout: C o e ffi c i e n ts I n te r c e p t 1 6 3 6 .4 1 4 7 2 6 X V a ria b le 1 1 .4 8 6 6 3 3 6 5 7 Graph of the Sample Regression Line: Example Annua l Sa le s ($000) 12000 10000 8000 6000 4000 2000 0 0 1000 2000 3000 4000 S q u a re F e e t 5000 6000 Interpretation of Results: Example Yˆi 1636.415 1.487 Xi The slope of 1.487 means that for each increase of one unit in X, we predict the average of Y to increase by an estimated 1.487 units. The model estimates that for each increase of one square foot in the size of the store, the expected annual sales are predicted to increase by $1487.