Question

Step by step and by showing your work answer the questions below
Corporate triple A bond interest rate for 12 consecutive months follow.
9.5 9.3 9.4 9.6 9.8 9.7 9.8 10.5 9.9 9.7 9.6 9.6
(a) Develop 3-month and 4-month month averages for this time series. Does the 3-
month or 4-month moving average provide the better forecast? Explain.
(b) What is the moving average forecast for the next month?

Answer 1

(a)
3-month moving average:
(9.5 + 9.3 + 9.4) / 3 = 9.4
(9.3 + 9.4 + 9.6) / 3 = 9.43
(9.4 + 9.6 + 9.8) / 3 = 9.6
(9.6 + 9.8 + 9.7) / 3 = 9.7
(9.8 + 9.7 + 9.8) / 3 = 9.77
(9.7 + 9.8 + 10.5) / 3 = 9.67
(9.8 + 10.5 + 9.9) / 3 = 10.07
(10.5 + 9.9 + 9.7) / 3 = 10.03
(9.9 + 9.7 + 9.6) / 3 = 9.73
(9.7 + 9.6 + 9.6) / 3 = 9.63
Average of the 3-month moving average = 9.726

4-month moving average:
(9.5 + 9.3 + 9.4 + 9.6) / 4 = 9.45
(9.3 + 9.4 + 9.6 + 9.8) / 4 = 9.525
(9.4 + 9.6 + 9.8 + 9.7) / 4 = 9.63
(9.6 + 9.8 + 9.7 + 9.8) / 4 = 9.725
(9.8 + 9.7 + 9.8 + 10.5) / 4 = 9.95
(9.7 + 9.8 + 10.5 + 9.9) / 4 = 10.225
(9.8 + 10.5 + 9.9 + 9.7) / 4 = 10.225
(10.5 + 9.9 + 9.7 + 9.6) / 4 = 9.925
(9.9 + 9.7 + 9.6 + 9.6) / 4 = 9.7
Average of the 4-month moving average = 9.802

The 4-month moving average provides the better forecast as it is closer to the actual values overall.

(b) The moving average forecast for the next month using the 4-month moving average would be 9.7.