Regression and Correlation

Regression Analysis: The regression analysis is a technique of studying the dependent variable
and independent variable. The simplest form of the regression line is the relationship between X
(independent variable) and Y (dependent variable to be estimated) is a straight line as follows
Y  a  bX , where a is the intercept, b is the slope or regression coefficient of the straight line.

Regression equation of X on Y

Y  aN  b X  XY  a X  b X 2

Problem Calculate the regression equation of X on Y from the data

X: 1 2 3 4 5

Y: 2 5 3 8 7

Solution:

 x  15  y  25
 x  55
2
y 2
 151
 xy  88
We have

25  5a  15b
88  15a  55b

then we obtain a =1.10 and b = 1.30

So,

Y  a  bX  1.10  1.30 X .

Correlation: Correlation coefficient is a quantitative measure of the direction and

strength of linear relationship between two numerically measured variables.

 n

cov( X , Y )  ( x  x)( y
i i  y)
S xy
rxy  co.coff .   i 1
 .
V ( X ) V (Y ) n n
S xx  S yy
 ( x  x)  ( y
i 1
i
2

i 1
i  y)2

We have

cov( X ,Y )  E[( X   X )(Y  Y )]  E( XY )  E( X ) E(Y )

Properties

1. Cov(X,Y)=Cov(Y,X)
2. Cov(X,X)=Var(X)
3. Cov(aX,Y)=aCov(X,Y)
4. Cov(X+Z,Y)=COv(X,Y)+Cov(Y,Z)
5. Cov(X,Y)=0, if X and Y are independent.

Example: Suppose that the mathematics marks and Statistics marks for five students as follows:

Math (x) Stat (y)

64 70

72 68

60 45

80 77

42 47

Solution: We compute the correlation as follows:

x  63.5 y  61.4
x 2
 21044 y 2
 19687
S xx  819.2 S yy  837.2
 xy  20210 S xy  684.8

So,

684.8
rxy   0.827.
819.2  837.2
Significance of Correlation

1. Most of the variables show some kind of relationship between price and supply, income
and expenditure etc. The correlation analysis can measure in one figure the degree of
relationship existing between variables.

2. Once we know the two variables are closely related, we can estimate the value of one
variable given the value of another.

3. Correlation analysis contributes to the economic behavior, aids in locating the critically
important variables on which other depend.

Types of Correlation

1.Positive and negative

2.Simple, partial and multiple and

3.Linear and nonlinear

Difference between Correlation and Regression Analysis

1. Correlation coefficient is a measure of degree of relationship between X and Y. The objective of

regression analysis is to study the nature of relationship between the variables.

2. The cause and effect relation is clearly indicated through regression analysis. Correlation is a
tool of ascertaining the degree of relationship between two variables.