Correlation and Linear

Regression
Chapter 13

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Learning Objectives
LO13-1 Explain the purpose of correlation analysis
LO13-2 Calculate a correlation coefficient to test and interpret
the relationship between two variables
LO13-3 Apply regression analysis to estimate the linear
relationship between two variables
LO13-4 Evaluate the significance of the slope of the regression
equation
LO13-5 Evaluate a regression equation’s ability to predict using the
standard error of the estimate and the coefficient of
determination
LO13-6 Calculate and interpret confidence and prediction
intervals
LO13-7 Use a log function to transform a nonlinear relationship
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What is Correlation Analysis?
 Used to report the relationship between two variables
CORRELATION ANALYSIS A group of techniques to measure the
relationship between two variables.

 In addition to graphing techniques, we’ll develop

numerical measures to describe the relationships
Examples
 Does the amount Healthtex spends per month on
training its sales force affect its monthly sales?
 Does the number of hours students study for an exam
influence the exam score?

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Scatter Diagram
 A scatter diagram is a graphic tool used to portray the
relationship between two variables
 The independent variable is scaled on the X-axis and is the
variable used as the predictor
 The dependent variable is scaled on the Y-axis and is the
variable being estimated

Graphing the data in a scatter

diagram will make the
relationship between sales
calls and copiers sales easier
to see.

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Scatter Diagram Example
North American Copier Sales sells copiers to businesses of all sizes throughout the
United States and Canada. The new national sales manager is preparing for an
upcoming sales meeting and would like to impress upon the sales representatives the
importance of making an extra sales call each day. She takes a random sample of 15
sales representatives and gathers information on the number of sales calls made last
month and the number of copiers sold. Develop a scatter diagram of the data.

Sales reps who make

more calls tend to
sell more copiers!

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Correlation Coefficient (ch4)

 The characteristics of the correlation coefficient are

summarized as follows:

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Correlation Coefficient (2 of 2)
 The following graphs summarize the strength and
direction of the correlation coefficient

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Correlation Coefficient, r
How is the correlation coefficient determined? We’ll use North American Copier
Sales as an example. We begin with a scatter diagram, but this time we’ll draw a
vertical line at the mean of the x-values (96 sales calls) and a horizontal line at the
mean of the y-values (45 copiers).

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Correlation Coefficient, r, Continued
How is the correlation coefficient determined? Now we find the deviations from
the mean number of sales calls and the mean number of copiers sold; then multiply
them. The sum of their product is 6,672 and will be used in formula 13-1 to find r.
We also need the standard deviations. The result, r=.865 indicates a strong,
positive relationship.

r= = 0.865
. .

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Correlation Coefficient Example
The Applewood Auto Group’s marketing department believes younger buyers
purchase vehicles on which lower profits are earned and older buyers purchase
vehicles on which higher profits are earned. They would like to use this information as
part of an upcoming advertising campaign to try to attract older buyers. Develop a
scatter diagram and then determine the correlation coefficient. Would this be a useful
advertising feature?

The scatter diagram suggests that a positive

relationship does exist between age and profit, but
it does not appear to be a strong relationship.

Next, calculate r, which is 0.262. The

relationship is positive but weak. The data
does not support a business decision to
create an advertising campaign to attract
older buyers!

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Testing the Significance of r
 Recall that the sales manager from North American
Copier Sales found an r of 0.865
 Could the result be due to sampling error? Remember
only 15 salespeople were sampled
 We ask the question, could there be zero correlation in
the population from which the sample was selected?
 We’ll let represent the correlation in the population
and conduct a hypothesis test to find out

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Testing the Significance of r Example
Step 1: State the null and the alternate hypothesis
H0: ρ = 0 The correlation in the population is zero
H1: ρ ≠ 0 The correlation in the population is different from zero
Step 2: Select the level of significance, we’ll use .05
Step 3: Select the test statistic, we use t
Step 4: Formulate the decision rule, reject H0 if t < 2.160 or > 2.160

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Testing the Significance of r Example
Continued

Step 5: Compute the test statistic, make decision; reject H0, t=6.216

Step 6: Interpret; there is correlation with respect to the number of sales calls
made and the number of copiers sold in the population of salespeople.

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Testing the Significance of the Correlation
Coefficient
In the Applewood Auto Group example, we found an r=0.262 which is positive, but
rather weak. We test our conclusion by conducting a hypothesis test that the
correlation is greater than 0.

Step 1: State the null and the alternate hypothesis

H0: ρ ≤ 0 The correlation in the population is negative or zero
H1: ρ > 0 The correlation in the population is positive
Step 2: Select the level of significance, we’ll use .05
Step 3: Select the test statistic, we use t
Step 4: Formulate the decision rule, reject H0 if t > 1.653
Step 5: Make decision, reject H0, t=3.622
Step 6: Interpret, there is correlation with respect to profits and age of the buyer

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