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

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 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
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