Question

To have a stable forecasting tool when using the simple moving average method, what value of n (the number of periods) should a firm choose among the following choices?

a) Large n
b) Small n
c) Moderate n
d) No specific value required

Answer 1

A moderate n value is recommended for a stable forecasting tool using the simple moving average method, balancing responsiveness with smoothing. The adequate size for n depends on data variability and desired accuracy. An n of at least 30 is often necessary for normal approximation.

Step-by-step explanation:

To have a stable forecasting tool when using the simple moving average method, a firm should choose a value of n that is not too large nor too small; a moderate n is typically most beneficial. A large n smooths out the fluctuations too much, which may result in losing relevant information about recent changes, whereas a small n may be too reactive to random fluctuations, making the forecast less reliable.

The 'adequate' size for n depends on the variability of the data, the desired margin of error, and the shape of the distribution of the data. It is critical to have an n that is sufficiently large to ensure a representative sample; often, n should be at least 30 or more if the original population is far from normal. If specific confidence levels and margins of error are desired, the error-bound formula can be used to calculate a more precise sample size n.