Business Forecasting Assignment 2

By
Arun Chaitanya Salivendra, Aigerim Kabdolova, Perizat Maksot, Margaryta Urbano, Cheng Li
Question 3.
Prevailing Mean: includes 3 variables: E/P, b/m, svar

The root mean squared forecast error of the prevailing mean is 0.0197

Question 4.
Forecast from the Kitchen Sink model that includes all 11 variables:

Because we included all 11 variables, this forecast might be slightly overfitting compared to
other forecasts. This does not necessarily mean that all 11 variables are significant in predicting
excess returns.
The root mean squared forecast error of the Kitchen Sink model is equal to 0.0216
Question 5:
Model

Mean Return

Sharpe Ration

Prevailing Mean

0.0048

0.0202

Kitchen Sink

0.0034

0.0147

Our preferred model ???