Question

Please provide an example and then discuss how regression analysis may be used as a forecasting tool.

Thank you.

Answer 1

Solution:

Regresson analysis is used to predict a response variable based on one or more explanatory variables. It can be used to determine which kinds of variables that we have information on can be used to forecast or predict variables that we don't have information on.

For example, I can use general economic indicators like the Dow Jones Industrial average and the consumer price index to forecast demand for my product or service. By using these two input variables, I can predict demand, and also find out what percentage of the variation in demand is due to these two variables.

How is regression analysis used in forecasting? Provide examples.

Regression analysis can be used in forecasting by using time as the independent variable. For example, let's assume that my revenue increases linearly over time. I can use the year as the x variable, and revenue as the y variable. Then I can predict the revenue in a particular year, as long as I don't go too far from the present (or last year of analysis). I can also forecast other things like price of commodities or number of available suppliers.

It will calculate or predict for us a future value using existing values. In financial modeling, the forecast function can be useful in calculating the statistical value of a forecast made. For example, if we know the past earnings and in Excel to calculate a company's revenue based on the number of ads it runs.