Explanation:
Random walks are just that: random. In a random walk, the next period's value is the most recent value plus an unpredictable shock. Therefore, the most recent shipping units provide the best simple forecast of future units, but there is substantial uncertainty around that forecast (especially further into the future). That does not mean other information cannot be joined with previous shipping unit data, only that looking solely at unit information cannot reliably predict the direction of future changes.
(Book 2, Module 22.3, LO 22.c)
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Question 21
A quantitative analyst at Shipment Specialists has been given the task to prepare a presentation at the regional shippers conference. His 15-minute presentation is to cover various aspects associated with forecasting units for shipping-related activities. The analyst recognizes that the level of units shipped follows a random walk, but does not want to make a mathematical-oriented presentation. Which of the following statements is best constructed to achieve his goal of explaining a random walk in terms that are accurate but understandable to those in the audience?
A
Random walks are a series that are known with certainty, so knowing only previous shipping units are indicators of future shipping units.
B
Random walks are a series with a high level of certainty, so knowing only previous shipping units will provide almost guaranteed forecasts of future shipping units.
C
Random walks are a series with a medium level of certainty, so knowing only previous shipping units will provide a general indication of future shipping units.
D
Random walks are a series with little certainty, so knowing only previous shipping units provides a best simple forecast equal to the most recent value, but the forecast errors are unpredictable.
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