Question

To select a value for α for exponential smoothing

a. use a small α when the series varies substantially.
b. use a large α when the series has little random variability.
c. use any value between 0 and 1
d. All of the alternatives are true.

Answer 1

When selecting an alpha value for exponential smoothing, use a small alpha for highly variable series, a large alpha for stable series, and always choose a value between 0 and 1. All provided options are true.

Step-by-step explanation:

The question relates to the selection of the α (alpha) value for exponential smoothing, which is a technique used in time series forecasting. When choosing α, the following guidelines apply:

• Use a small α when the series varies substantially: A smaller α weighs the historical data more heavily, making the forecast less responsive to recent changes, which is beneficial when the data is highly volatile.
• Use a large α when the series has little random variability: A larger α gives more weight to the most recent observations, making the forecast more responsive to changes. This is preferable when the data series is relatively smooth with little random noise.
• Use any value between 0 and 1: The α value must be within this range, as it represents the weight given to the most recent observation in the calculation. Values outside of this range would not be mathematically valid in the context of exponential smoothing.

All of the provided alternatives are indeed true, making option d the correct comprehensive answer.