Aggregate forecasts are always better than the set of component forecasts because the standard deviation of the total (T) of (n) components is equal to the _____ multiplied by the standard deviation of the individual components.

Question

Quizplus · Accepted Answer

The standard deviation of the total (T) of (n) components is equal to the square root of n multiplied by the standard deviation of the individual components. This principle is based on the statistical property that, when aggregating forecasts or components, the variability (measured as standard deviation) of the aggregate tends to be less than the sum of the individual variabilities, assuming the components are not perfectly correlated. This is why aggregate forecasts can be more accurate and reliable than individual or component forecasts.

Aggregate Forecasts Are Always Better Than the Set of Component