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    6 - Regression and Correlation PDF

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    Regression analysis is used to model the linear relationship between a dependent variable and one or more independent variables. Simple linear regression involves one independent and one dependent variable, while multiple linear regression involves one dependent variable and more than one independent variable. The strength of the linear relationship between variables is measured by the correlation coefficient r, which ranges from -1 to 1.

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    6 - Regression and Correlation PDF

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    95 views15 pages
    Regression analysis is used to model the linear relationship between a dependent variable and one or more independent variables. Simple linear regression involves one independent and one dependent variable, while multiple linear regression involves one dependent variable and more than one independent variable. The strength of the linear relationship between variables is measured by the correlation coefficient r, which ranges from -1 to 1.

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    Regression analysis is used to model the linear relationship between a dependent variable and one or more independent variables. Simple linear regression involves one independent and one dependent variable, while multiple linear regression involves one dependent variable and more than one independent variable. The strength of the linear relationship between variables is measured by the correlation coefficient r, which ranges from -1 to 1.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    95 views15 pages

    6 - Regression and Correlation PDF

    Uploaded by

    depressed potato
    Regression analysis is used to model the linear relationship between a dependent variable and one or more independent variables. Simple linear regression involves one independent and one dependent variable, while multiple linear regression involves one dependent variable and more than one independent variable. The strength of the linear relationship between variables is measured by the correlation coefficient r, which ranges from -1 to 1.

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    Regression Analysis

    Introduction:
    The dependence of one dependent variable
    on one or more independent variables is
    called regression. One of them is dependent
    variable and others are independent
    variables. For example sales depends on
    promotional expense. Using regression
    analysis it is possible to predict sales for a
    given promotion expense.
    Regression Model:
    • Simple Linear Regression Model:
    The linear relationship between two variable one is independent
    variable and other is dependent variable is called simple linear
    regression model. For example demand may be structured as a linear
    function 0f price.
    Symbolically we write the sample regression line as follows
    Y= a+bX
    Where
    Y = dependent variable
    X = independent variable
    a = constant term or intercept of line
    b= regression coefficient or slope of the line
    Multiple linear Regression
    model:
    The relationship between more than two variables one of them is
    dependent and others are independent variables is called multiple
    linear regression model.
    Y = a +b1 X1 + b2 X2 + b3 X3 .........................
    Where
    Y = dependent variable
    X1 = independent variable
    X2 = independent variable
    X3 = independent variable
    a = constant
    b1 = regression coefficient of x1
    b2 = regression coefficient of x2
    b3 = regression coefficient of x3
    • Independent variable is also known as
    Regressor
    Predictor
    Explanatory variable
    • Dependent variable is also known as
    Regressand
    Predictand
    Explained variable
    Scatter diagram
    The scatter diagram graphs pairs of numerical data, with one variable on each
    axis, to look for a relationship between them
    Some Applications of
    Regression:

    Relationship between Advertisement expenditure


    and sales
    Relationship between heights and weights
    Relationship between saving and income
    Relationship between prices and demand
    Relationship between prices, demand and income
    Relationship between sales, sales promotional
    expense and prices
    Formulas of Slope and Intercept
    • Slope Equation.
    n(SXY ) - (SXSY )
    b=
    n(SX ) - (SX)
    2 2

    • Intercept Equation.

    Sy SX
    a= -b
    n n 8
    Simple Correlation
    • Measures the strength of the linear
    relationship between two variables
    • It takes a value between +1 and -1
    • +1 means perfect correlation with both
    terms rising together
    • 0 means no linear relationship
    • -1 means perfect correlation and as one
    variable rises the other falls

    9
    10
    Examples of Approximate
    r Values
    R = 1 or - 1
    Perfect linear relationship between X and Y:

    100% of the variation in Y is explained by variation in X

    Y
    Y

    X X
    r=1
    r = -1
    Examples of Approximate
    r Values
    -1 <r< 0 or 0 < r < 1

    Weaker linear relationships between X and Y:

    Some but not all of the variation in Y is explained by


    variation in X

    Y
    Y

    X X
    Examples of Approximate
    r Values
    r=0

    No linear relationship between X and Y:

    The value of Y does not depend on X. (None of the


    variation in Y is explained by variation in X)

    X
    r=0
    The Coefficient of Correlation, r
    The Coefficient of Correlation (r) is a measure of the strength
    of the relationship between two variables. It requires interval
    or ratio-scaled data.
     It can range from -1 to 1
     Values of -1 or 1 indicate perfect and strong correlation.
     Values close to 0 indicate weak correlation.
     Negative values indicate an inverse relationship and positive
    values indicate a direct relationship.

    ( X )(Y )
    ( XY ) 
    n
    r 
    2 2
    2 ( X ) 2 ( Y )
    ([X  ] * [ Y  ])
    n n
    Example
    • Correlation between the monthly
    returns on Share 1 and Share 2 is
    0.4313
    • As the value is not close to zero, there
    is evidence of a linear relationship
    • The relationship is positive, so that
    monthly returns on both shares rise
    and fall together
    • The relationship is not very close to 1,
    so it is not really strong
    15

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