Zanda Corp.has been testing the performance of two different forecasting models to see which it should adopt for use.It wants to choose the model that has the smaller standard deviation of the forecast errors.Zanda should compare which of the following to make its choice?
A)MAD of the two models
B)MAPE of the two models
C)RMSE of the two models
D)MFE of the two models

Question

Quizplus · Accepted Answer

RMSE (Root Mean Squared Error) is a measure of the average magnitude of the forecast errors and it takes into account both the bias (average error) and variability (standard deviation of errors) of the forecast. Therefore, choosing the model with the smaller RMSE will also ensure that the model has a smaller standard deviation of the forecast errors. MAD (Mean Absolute Deviation) and MAPE (Mean Absolute Percentage Error) only consider the average magnitude of the forecast errors and do not take variability into account, while MFE (Mean Forecast Error) only considers the bias of the forecast errors and not the variability.