Unbiased forecast, Example11, Reading9

CFA Level II Quant
#1

Can someone please explain to me why an unbiased forecast will have an expected value of forecast error = 0?

ii don’t understand. Example 11

thanks

#2

An expected value of 0 for error term in a regression is one of the 6 assumptions needed for a linear regression to be correctly specified. (It’s assumption 3 actually)

#3

“Unbiased” means that the expected value of the statistic is the value of the parameter it’s estimating.

#4

Just tacking on to yours further for the original question…

#5

Looks good to me.

#6

But it stated " even though forecasts cn be inaccurate, we hope at least that they can be unbiased…"

if thhe forecast n the actual value r equal for it to be unbiased, then how can it be inaccurate?

#7

Imagine a time when carpenters used hammers. (These days they use nail guns.)

A skilled carpenter driving a nail will be accurate and unbiased in his hammer blows: he’ll hit the nail on the head every time, with little variation in the impact point.

An unskilled carpenter will be inaccurate – he’ll miss to the right of, to the left of, above, and below the nail – but may well be unbiased: the dents in the wood will be centered about the nail.

#8

HHAHAHA I like your analogy! N I got it now…thanks!

#9

Always happy to help.