Consider the following graph, which shows the sun spot activity (plain black lin

Question

Consider the following graph, which shows the sun spot activity (plain black line), plotted against two different sets of forecasts for that activity, both created with simple exponential smoothing: 180 160 140 120 100 Number of Sun Spots 80 Exponential smoothing Forecast 1 Exponential smoothing Forecast2 60 40 20 Exponential smoothing Forecast 2 (the lighter graph line marked with triangles) was created using 0.40 for the alpha value (a). Which of the following is most likely to be the alpha value (a) used for Exponential smoothing Forecast 1 (the graph line marked with squares)? 0.80 O 0.40 O 0.00 0.65 0.05

Explanation / Answer

Correct option is alpha = 0.05

In exponential smoothing forecast, the alpha value might range from 0 to 1. Alpha value near zero exhibits slow smoothing with rather calm curve. Contrary to this, as alpha value tend to 1 it shows fast smoothing and volatility in forecast.

For exponential smoothing forecast 1 (graph line marked with squares), the alpha value will be smaller than that of the exponential smoothing forecast 2. Because the line for exponential smoothing forecast 1 is relatively calm. Thus, options 0.80, 0.40, and 0.65 are eliminated. The alpha value cannot be zero, otherwise the line would have been straight. Hence, the correct option is 0.05.

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