New Enroll in our GIC Finance Online Course Here!

    Register

    Question

    What is the primary objective of exponential smoothing

    in time series forecasting?
    A To eliminate all noise from the data before forecasting. Correct Answer Incorrect Answer
    B To smooth out trends and forecast future values based on weighted averages. Correct Answer Incorrect Answer
    C To compute the moving average by giving equal weight to all data points. Correct Answer Incorrect Answer
    D To decompose the series into trend, seasonal, and irregular components. Correct Answer Incorrect Answer
    E To account for large fluctuations by using higher-order differences. Correct Answer Incorrect Answer

    Solution

    Exponential smoothing is a forecasting technique that assigns exponentially decreasing weights to past observations, giving more weight to the most recent data. The primary goal is to smooth out short-term fluctuations (noise) in time series data while keeping the underlying trend intact. By applying weighted averages, exponential smoothing effectively captures recent patterns and adjusts the forecast accordingly. This technique is widely used in scenarios where the data shows little to no trend or seasonality and is easy to implement for short-term forecasting. The other options are incorrect because: • Option 1 (Eliminating noise) is not the main goal. Exponential smoothing deals with smoothing data but not the complete elimination of noise. • Option 3 (Equal weight) is a characteristic of simple moving averages, not exponential smoothing, where weights decrease exponentially. • Option 4 (Decomposing the series) refers to decomposition techniques like classical decomposition or STL decomposition, not smoothing methods. • Option 5 (Higher-order differences) is a technique used for differencing in ARIMA models, not in exponential smoothing.

    Practice Next