ASSUMPTION CHECKING

1. Normality
2. Homogeneity
3. Linearity
4. Multicollinearity

Normality assumption :The data points equally spread across mean value, it is said the data is normally
distributed, if there is too much deviation the data is distribution free, not normally distributed
Normality assumption should be checked only on dependent variable
Formulation of hypothesis
H0 the data is normally distributed
H1 the data is distribution free or not normally distributed
Or
H0 the data is not deviated from the normality assumption
H1 the data is deviated from the normality assumption
Open file – normality
Steps – analyse→descriptive statistic→explore →

→explore menu opens → place DV financial literacy in dependent list → go to plots → explore:plots
menu appear→ uncheck leaf and stem → check histogram → check on normality plots with test →
continue→ ok
Output

Tests of Normality
Kolmogorov-Smirnova Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
financiallitera
.183 20 .078 .956 20 .464
cy
a. Lilliefors Significance Correction

There are two approach to test the normality

- Kolmogorov-Smirnov---sample size is < 30
- Shapiro-Wilk---------sample size is > 30
In this case – sample size is 20 i.e < 30 -----consider Kolmogorov Smirnov test
P value = 0.078 >0.05----- accept null hypothesis
H0 the data is normally distributed ------accepted
H1 the data is distribution free or not normally distributed ------rejected
Conclusion – data is normally distributed

2)Homogeneity assumption : it check the variance whether variance are equally assumed across the
different categories of the independent variable or variances are unequally assumed across the
independent variable
Eg: whether the financial literacy has equal variances between male and female or whether this financial
literacy has unequal variance between male and female
Variance equal----- homogeneity assumption is satisfied
Variance are unequal ---- homogeneity assumption is not satisfied
Formulation of hypothesis
H0 : the data has equal variance across the different category of independent variable
H1 : the data has unequal variance across the different category of the independent variable
Open file – homogeneity
Steps- Analyse→compare means→ one way anova→

→One way ANOVA menu appears → click on option → option menue appears→ check on
homogeneity of variance test → continue→ ok→

Output to test homogeneity

Test of Homogeneity of Variances

Vaolume (in Gallons)
Levene
Statistic df1 df2 Sig.
2.750 2 27 .082
P = 0.082> 0.05 ------- accept null hypothesis
H0 : the data has equal variance across the different category of independent variable--- accepted
H1 : the data has unequal variance across the different category of the independent variable ---rejected

Conclusion - homogeneity assumption satisfied

3)Linearity assumption : prominent in correlation and paired sample t test , whether there is
proportionate difference between dependent and independent variable or disproportionate relationship
between dependent and independent variable
Hypothesis formulation
H0: the data is linear in nature
H1: the data is non linear in nature
Open file – Linearity
Step- analyse→ compare means → means→

→means menu opens → place investment decision in dependent variable and financial literacy
independent varable box → click on options→ means: options menu appears → check on test for
linearity → continue→ ok
Output

ANOVA Table
Sum of Mean
Squares df Square F Sig.
Investment Between (Combined) 21.944 3 7.315 16.404 .000
Decisions * Groups Linearity 21.745 1 21.745 48.766 .000
Financial literacy Deviation from
.199 2 .099 .223 .800
Linearity
Within Groups 42.806 96 .446
Total 64.750 99

P value= 0.800 > 0.05-----accept the null hypothesis

H0: the data is linear in nature -------accepted

H1: the data is non linear in nature ------rejected
Conclusion – linearity assumption is satisfied

4) multicollinearity assumption: prominent in regression analysis, it is the occurrence of high

intercorrelation among two or more independent variable in the multiple regression model
Open file – multicollinearity
Step- analyse → regression → linear →
→linear regression menu appears → place investment decision in dependent variable box and remaining
four independent variable in independent box →next click on statistics → linear regression : statistics
menu appear → check on collinearity diagnostics →continue → ok
Output

Coefficientsa
Unstandardized Standardized Collinearity
Coefficients Coefficients Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) .171 .284 .603 .547
Financial
.188 .055 .184 3.420 .001 .919 1.088
Knowledge
Financial
.236 .074 .188 3.167 .002 .760 1.316
Behvaiour
Financial
.150 .066 .140 2.278 .024 .707 1.415
Attitude
Financial
.368 .069 .318 5.362 .000 .759 1.318
Literacy
a. Dependent Variable: Investment Decisions
VIF- variance inflation factor
if VIF < 5---- there is no multicollinearity issues
if tolerance value > 0.20----there is no multicollinearity issues
conclusion – since VIF value is less than 5 and tolerance value less than .20 , there is no
multicollinearity issues