When the underlying mean of a time series changes frequently but there is no trend,cyclical,or seasonal influence,
A) a simple moving average forecast with n = 20 should outperform a simple moving average forecast with n = 3.
B) a simple moving average forecast with n = 3 should outperform a simple moving average forecast with n = 20.
C) a simple moving average forecast with n = 20 should perform about the same as a simple moving average forecast with n = 3.
D) an exponential smoothing forecast with alpha = 0.01 should outperform a exponential smoothing forecast with alpha = 0.30.

Question

Quizplus · Accepted Answer

When the underlying mean changes frequently but there is no trend, cyclical, or seasonal influence, a simple moving average with a smaller window size will be able to capture the changes in the mean better than a larger window size. Therefore, a simple moving average with n = 3 should outperform a simple moving average with n = 20. Exponential smoothing may not be appropriate in this scenario because it assumes a stationary series, and a frequently changing mean violates that assumption.

When the Underlying Mean of a Time Series Changes Frequently