CBE Forecasting 3

Question 1

When the smoothing parameter α in exponential smoothing is set close to 1, the forecast:

Accepted Answer

Places almost all weight on the most recent observation

Answer

An α near 1 means the new forecast is almost entirely the most recent actual value, making the model very responsive to the latest data.

Question 2

Autocorrelation in forecast residuals most directly indicates:

Accepted Answer

The model has not fully captured the data's time-series structure

Answer

Autocorrelated residuals signal that predictable patterns remain unexploited by the model, implying the forecasting specification is incomplete.

Question 3

A leading indicator is best defined as a variable that:

Accepted Answer

Tends to change before the economy as a whole

Answer

Leading indicators peak and trough before the overall economy, making them useful for anticipating future economic turning points.

Question 4

In an ARIMA(p,d,q) model, the 'd' parameter represents:

Accepted Answer

The order of differencing applied to achieve stationarity

Answer

Differencing (d times) removes unit roots and non-stationarity so that the ARIMA model's AR and MA components can be applied reliably.

Question 5

Forecast bias is present when:

Accepted Answer

The mean forecast error is consistently positive or negative

Answer

Bias means the forecast systematically over- or under-predicts; an unbiased forecast has errors that average to zero over time.

(CBE) Certified Business Economist Practice Test