Simple Regression Tutorial by Prof. Haris Aslam from University Of Management and Technology Lahore Pakistan. A topic from Statistical Inferences.

1. Introduction to Linear Regression and Correlation Analysis

3. Scatter Plot Examples Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y x y x y y x x Linear relationships Curvilinear relationships

4. Scatter Plot Examples Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y x y x y y x x Strong relationships Weak relationships (continued)

5. Scatter Plot Examples Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y x y x No relationship (continued)

8. Examples of Approximate r Values Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- r = +.3 r = +1 y x y x y x y x y x r = -1 r = -.6 r = 0

9. Calculating the Correlation Coefficient Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- where: r = Sample correlation coefficient n = Sample size x = Value of the independent variable y = Value of the dependent variable Sample correlation coefficient: or the algebraic equivalent:

10. Calculation Example Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Tree Height Trunk Diameter y x xy y 2 x 2 35 8 280 1225 64 49 9 441 2401 81 27 7 189 729 49 33 6 198 1089 36 60 13 780 3600 169 21 7 147 441 49 45 11 495 2025 121 51 12 612 2601 144  =321  =73  =3142  =14111  =713

11. Calculation Example Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Trunk Diameter, x Tree Height, y (continued) r = 0.886 -> relatively strong positive linear association between x and y

12. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Excel Correlation Output Tools / data analysis / correlation… Correlation between Tree Height and Trunk Diameter

14. Example: Produce Stores Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Is there evidence of a linear relationship between tree height and trunk diameter at the .05 level of significance? H 0 : ρ = 0 (No correlation) H 1 : ρ ≠ 0 (correlation exists)  =.05 , df = 8 - 2 = 6

15. Example: Test Solution Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Conclusion: There is sufficient evidence of a linear relationship at the 5% level of significance Decision: Reject H 0 Reject H 0 Reject H 0  /2=.025 -t α /2 Do not reject H 0 0 t α /2  /2=.025 -2.4469 2.4469 4.68 d.f. = 8-2 = 6

18. Types of Regression Models Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Positive Linear Relationship Negative Linear Relationship Relationship NOT Linear No Relationship

19. Population Linear Regression Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Linear component The population regression model: Population y intercept Population Slope Coefficient Random Error term, or residual Dependent Variable Independent Variable Random Error component

21. Population Linear Regression Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- (continued) Random Error for this x value y x Observed Value of y for x i Predicted Value of y for x i x i Slope = β 1 Intercept = β 0 ε i

22. Estimated Regression Model Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- The sample regression line provides an estimate of the population regression line Estimate of the regression intercept Estimate of the regression slope Estimated (or predicted) y value Independent variable The individual random error terms e i have a mean of zero

27. Sample Data for House Price Model Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- House Price in $1000s (y) Square Feet (x) 245 1400 312 1600 279 1700 308 1875 199 1100 219 1550 405 2350 324 2450 319 1425 255 1700

29. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- The regression equation is: Regression Statistics Multiple R 0.76211 R Square 0.58082 Adjusted R Square 0.52842 Standard Error 41.33032 Observations 10 ANOVA df SS MS F Significance F Regression 1 18934.9348 18934.9348 11.0848 0.01039 Residual 8 13665.5652 1708.1957 Total 9 32600.5000 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

36. Explained and Unexplained Variation Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- (continued) X i y x y i SST =  ( y i - y ) 2 SSE =  ( y i - y i ) 2  SSR =  ( y i - y ) 2  _ _ _ y  y y _ y 

39. Examples of Approximate R 2 Values Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- R 2 = +1 y x y x R 2 = 1 R 2 = 1 Perfect linear relationship between x and y: 100% of the variation in y is explained by variation in x

40. Examples of Approximate R 2 Values Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y x y x 0 < R 2 < 1 Weaker linear relationship between x and y: Some but not all of the variation in y is explained by variation in x (continued)

41. Examples of Approximate R 2 Values Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- R 2 = 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) y x R 2 = 0 (continued)

42. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- 58.08% of the variation in house prices is explained by variation in square feet Regression Statistics Multiple R 0.76211 R Square 0.58082 Adjusted R Square 0.52842 Standard Error 41.33032 Observations 10 ANOVA df SS MS F Significance F Regression 1 18934.9348 18934.9348 11.0848 0.01039 Residual 8 13665.5652 1708.1957 Total 9 32600.5000 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

44. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- The critical F value from Appendix H for  = .05 and D 1 = 1 and D 2 = 8 d.f. is 5.318. Since 11.085 > 5.318 we reject H 0 : ρ 2 = 0 Regression Statistics Multiple R 0.76211 R Square 0.58082 Adjusted R Square 0.52842 Standard Error 41.33032 Observations 10 ANOVA df SS MS F Significance F Regression 1 18934.9348 18934.9348 11.0848 0.01039 Residual 8 13665.5652 1708.1957 Total 9 32600.5000 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

47. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Regression Statistics Multiple R 0.76211 R Square 0.58082 Adjusted R Square 0.52842 Standard Error 41.33032 Observations 10 ANOVA df SS MS F Significance F Regression 1 18934.9348 18934.9348 11.0848 0.01039 Residual 8 13665.5652 1708.1957 Total 9 32600.5000 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

48. Comparing Standard Errors Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y y y x x x y x Variation of observed y values from the regression line Variation in the slope of regression lines from different possible samples

50. Inference about the Slope: t Test Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Estimated Regression Equation: The slope of this model is 0.1098 Does square footage of the house affect its sales price? (continued) House Price in $1000s (y) Square Feet (x) 245 1400 312 1600 279 1700 308 1875 199 1100 219 1550 405 2350 324 2450 319 1425 255 1700

52. Regression Analysis for Description Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Confidence Interval Estimate of the Slope: Excel Printout for House Prices: At 95% level of confidence, the confidence interval for the slope is (0.0337, 0.1858) d.f. = n - 2 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

53. Regression Analysis for Description Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Since the units of the house price variable is $1000s, we are 95% confident that the average impact on sales price is between $33.70 and $185.80 per square foot of house size This 95% confidence interval does not include 0 . Conclusion: There is a significant relationship between house price and square feet at the .05 level of significance Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386 Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

54. Confidence Interval for the Average y, Given x Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Confidence interval estimate for the mean of y given a particular x p Size of interval varies according to distance away from mean, x

55. Confidence Interval for an Individual y, Given x Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Confidence interval estimate for an Individual value of y given a particular x p This extra term adds to the interval width to reflect the added uncertainty for an individual case

56. Interval Estimates for Different Values of x Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- y x Prediction Interval for an individual y, given x p x p y = b 0 + b 1 x  x Confidence Interval for the mean of y, given x p

57. Example: House Prices Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Estimated Regression Equation: Predict the price for a house with 2000 square feet House Price in $1000s (y) Square Feet (x) 245 1400 312 1600 279 1700 308 1875 199 1100 219 1550 405 2350 324 2450 319 1425 255 1700

58. Example: House Prices Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Predict the price for a house with 2000 square feet: The predicted price for a house with 2000 square feet is 317.85($1,000s) = $317,850 (continued)

59. Estimation of Mean Values: Example Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Find the 95% confidence interval for the average price of 2,000 square-foot houses Predicted Price Y i = 317.85 ($1,000s)  Confidence Interval Estimate for E(y)|x p The confidence interval endpoints are 280.66 -- 354.90, or from $280,660 -- $354,900

60. Estimation of Individual Values: Example Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Find the 95% confidence interval for an individual house with 2,000 square feet Predicted Price Y i = 317.85 ($1,000s)  Prediction Interval Estimate for y|x p The prediction interval endpoints are 215.50 -- 420.07, or from $215,500 -- $420,070

64. Residual Analysis for Linearity Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Not Linear Linear  x residuals x y x y x residuals

65. Residual Analysis for Constant Variance Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- Non-constant variance  Constant variance x x y x x y residuals residuals

66. Excel Output Business Statistics: A Decision-Making Approach, 7e © 2008 Prentice-Hall, Inc. Chap 14- RESIDUAL OUTPUT Predicted House Price Residuals 1 251.92316 -6.923162 2 273.87671 38.12329 3 284.85348 -5.853484 4 304.06284 3.937162 5 218.99284 -19.99284 6 268.38832 -49.38832 7 356.20251 48.79749 8 367.17929 -43.17929 9 254.6674 64.33264 10 284.85348 -29.85348