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QT Module-3

The document discusses various forecasting methods, including correlation and regression analysis, as well as time series analysis. It explains the significance of correlation coefficients, the computation of Spearman’s rank correlation, and the role of regression analysis in predicting unknown values based on known variables. Additionally, it outlines the components of time series and their importance in understanding past behavior and planning future operations.

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Devika Arul
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Download as PDF, TXT or read online on Scribd
2 views

QT Module-3

The document discusses various forecasting methods, including correlation and regression analysis, as well as time series analysis. It explains the significance of correlation coefficients, the computation of Spearman’s rank correlation, and the role of regression analysis in predicting unknown values based on known variables. Additionally, it outlines the components of time series and their importance in understanding past behavior and planning future operations.

Uploaded by

Devika Arul
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE - III

FORECASTING METHODS
BUSINESS FORECASTING
CORRELATION & REGRESSION ANALYSIS
TIME SERIES ANALYSIS
Karl Pearson’s Correlation Coefficient
r = (ΣXY/N) - [X- Y- ]
-----------------
σX σ Y
________________________
2 - 2
σX = √ (ΣX /N ) – (X )
_________________________________

σY = √ (ΣY2 /N ) – (Y-)2

2
Rank Correlation Coefficient
◦ Developed by British psychologist Charles, Edward Spearman in 1904

◦ Rank correlation coefficient is applied to a set of ordinal rank numbers

◦ Useful when quantitative measure of certain factors cannot be fixed, but the
group can be ranked

◦ Spearman’s rank correlation coefficient is defined as R = 1- 6ΣD2/ N(N2 -1)


where R denotes rank coefficient of correlation and D refers to the difference
of ranks between paired items in two series.
3
Value of R

◦ R lies between +1 and -1

◦ When R is +1, there is complete agreement in the order of the

ranks and the ranks are in the same direction

◦ When R is -1, there is complete agreement in the order of the

ranks and they are in opposite directions 4


Computing Spearman’s Rank Coefficient
◦ Where actual ranks are given, the steps required for computing rank
correlation are:
◦ Take the differences of the two ranks, i.e. (R1 – R2) and denote these
differences by D
◦ Square these differences and obtain the total ΣD2
◦ Apply the formula: R = 1- 6ΣD2/(N3-N)
◦ When we are given the actual data and not the ranks, it will be necessary to
assign the ranks
◦ Ranks can be assigned by taking either the highest value as 1 or the lowest
value as 1
5
Computing Spearman’s Rank Coefficient
Equal Ranks or Tie in Ranks

◦ When there is a tie, each entry is given an average rank, for e.g. if two entries
are ranked at first place, they are each given the rank (1+2)/2 = 1.5

◦ If three are ranked at first place, they are given the rank (1+2+3)/3 = 6/3 = 2

◦ Where equal ranks are assigned to some entries, an adjustment is made in the
formula:
6[ΣD2 + (m3 – m)/12]
R = 1 - -----------------------------
N3 - N 6
REGRESSION ANALYSIS
Regression Analysis
◦ The statistical tool with the help of which we are in a position to estimate (or

predict) the unknown values of one variable from known values of another

variable is called regression

◦ Regression Analysis helps to find out the average probable change in one

variable given a certain amount of change in another

E.g. : Advertisement & Sales; Price & Demand


Regression Analysis - Importance
◦ It provided estimates of values of the dependent variables from values of
independent variables
◦ RA is also used to obtain a measure of the error involved in using the regression line
as a basis for estimations. For this, standard error is calculated. If the line fits the data
closely, i.e., if there is relatively little scatter of the observations around the
regression line, good estimate can be made of Y variable
◦ On the other hand , if there is a great deal of scatter of the observations around the
fitted regression line, the line will not produce accurate estimates of the dependent
variable
◦ With RA, we can obtain a measure of the degree of association or correlation that
exists between the two variables. The coefficient of determination calculated for this
purpose measures the strength of the relationship that exists between the variables
Correlation & Regression Analysis

1. Correlation Coefficient is a measure of degree of relationship between X and Y; the

objective of Regression Analysis is to study the “nature of relationship” between the

variables

2. The cause and effect relation is clearly indicated through regression analysis than by

correlation. In Correlation Analysis, we cannot say that one variable is the cause and the

other is the effect.


Regression Lines
◦ Two Variables (X, Y) : Two regression lines i.e. Regression Line of X on Y and Regression Line of Y
on X

◦ The Regression line of Y on X gives the most probable values of Y for given values of X

◦ Two regression lines will coincide – when there is either perfect positive or perfect negative
correlation

◦ Regression lines are farther from each other – Less correlation

◦ Nearer – Higher is the degree of correlation

◦ Lines of regression are at right angles – r is zero, variables are independent

◦ Regression Lines cut each other at the point of average of X and Y


Regression Equations
◦ Regression equations are algebraic expressions of the regression lines

◦ Since there are two regression lines, there are two regression equations

◦ The regression equation of Y on X is used to describe the variations in the values


of Y for a given change in X
◦ A linear regression line has an equation of the form Y = a + bX, where X is the
explanatory variable and Y is the dependent variable. The slope of the line is b,
and a is the intercept (the value of y when x = 0).
BUSINESS FORECASTING
Methods of Forecasting, Time Series Analysis: Components of Time Series
Forecasting
◦ When estimates of future conditions are made on a systematic basis, the
process is referred to as “forecasting” and the figure or statement obtained is
known as a “forecast”.

◦ Forecasting is concerned with two main tasks:

1. The determination of the best basis available for the formation of intelligent
managerial expectations

2. The handling of uncertainty about the future, so that implication of


decisions become explicit
Forecast
Forecasts are commonly applied to:
1. Capital Investment Decisions

2. Strategic Planning

3. Product and Market Planning

4. Production Planning and Stock Control

5. Budgetary Control and Financial Planning

6. Competitive Position Planning


Functions of Forecasting
◦ The creation of plans of action

◦ Monitoring the continuing progress of plans based on forecasts

◦ Provides a warning system of the critical factors to be monitored


regularly because they might drastically affect the performance of
the plan
Steps in Forecasting
◦ Understanding why changes in the past have occurred

◦ Determining which phases of business activity must be measured

◦ Selecting and compiling data to be used as measuring devices

◦ Analysis of data
Methods of Forecasting
◦ Historical Analogy Method ◦ Econometric Models

◦ Field Surveys and Opinion Poll ◦ Lead-Lag Analysis

◦ Business Barometers ◦ Exponential Smoothing

◦ Extrapolation ◦ Input-Output or End –Use

◦ Regression Analysis Analysis

◦ Time Series Analysis


Time Series Analysis
◦ Statistical data which are collected, observed or recorded at successive
intervals of time is referred to as “time series”.
E.g. Sales or imports over the last 5 years
Year Sales (in ‘000) Year Sales (in ‘000)

1998 40 2002 43

1999 32 2003 48

2000 47 2004 65

2001 41 2005 42
What did you notice ?
◦ Generally the sales have increased; but, for some years a decline is also
noticed.
◦ There may be several causes responsible for increase or decrease from one
period to another
◦ Changes in tastes and habits of people, growth of population, availability of
alternative products etc.
◦ It is very difficult to study the effect of various factors that have led either to
an increase or decrease in sales
Role of Time Series Analysis
◦ It helps in the understanding of past behavior

◦ It helps in planning future operations

◦ It helps in evaluating current accomplishments

◦ It facilitates comparison
Components of Time Series
Also called as Patterns, Variations of Movements

1. Secular Trend

2. Seasonal Variations

3. Cyclical Variations

4. Irregular Variations
Secular Trend
◦ Changes that have occurred as a result of general tendency of the data to increase

or decrease, is known as secular variations or trend

◦ Two types of trends:

1. Linear or Straight line trends

2. Non-Linear Trends
Seasonal Variations
◦ Changes that have taken place during a period of 12 months as a result of

change in climate, weather conditions, festivals etc.

◦ Such changes are called Seasonal Variations


Cyclical Variations
◦ Changes that have taken place as a result of boom and depressions.

◦ Such changes are classified under the head Cyclical Variations


Irregular Variations
◦ Also called as Erratic Variations

◦ Changes that have taken place as a result of such forces that could not be

predicted like floods, earthquakes, famines etc.

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