Unit 3 Slides QM PDF

Unit:3.18, 3.
19
Slide 1
Measures of Association
Between Two Variables
Thus far we have examined numerical methods used
to summarize the data for one variable at a time.
Often a manager or decision maker is interested in

the relationship between two variables.
Two descriptive measures of the relationship

between two variables are covariance and correlation
coefficient.
Slide 2
Covariance
The covariance is a measure of the linear association

between two variables.
Positive values indicate a positive relationship.
Negative values indicate a negative relationship.
Slide 3
Covariance
The covariance is computed as follows:
 ( xi − x )( yi − y ) for
sxy =
n −1 samples
 ( xi −  x )( yi −  y ) for
 xy = populations
N
Slide 4
Slide 5
Correlation Coefficient
Correlation is a measure of linear association and not

necessarily causation.
Just because two variables are highly correlated, it

does not mean that one variable is the cause of the
other.
Slide 6
The correlation coefficient is computed as follows:

sxy  xy
rxy =  xy =
sx s y  x y
for for
samples populations
Slide 7
The coefficient can take on values between -1 and +1.
Values near -1 indicate a strong negative linear

relationship.
Values near +1 indicate a strong positive linear

relationship.
The closer the correlation is to zero, the weaker the

relationship.
Slide 8
Covariance and Correlation Coefficient
◼ Example: Golfing Study

A golfer is interested in investigating the
relationship, if any, between driving distance and
18-hole score.
Average Driving Average
Distance (yds.) 18-Hole Score
277.6 69
259.5 71
269.1 70
267.0 70
255.6 71
272.9 69
Slide 9
x y ( xi − x ) ( yi − y ) ( xi − x )( yi − y )
277.6 69 10.65 -1.0 -10.65
259.5 71 -7.45 1.0 -7.45
269.1 70 2.15 0 0
267.0 70 0.05 0 0
255.6 71 -11.35 1.0 -11.35
272.9 69 5.95 -1.0 -5.95
Average 267.0 70.0 Total -35.40
Std. Dev. 8.2192 .8944
Slide 10

• Sample Covariance
sxy =
 ( x − x )( y
i i − y)
=
−35.40
= − 7.08
n−1 6−1
• Sample Correlation Coefficient
sxy −7.08
rxy = = = -.9631
sx sy (8.2192)(.8944)
Slide 11
Find the Coefficient of Correlation
(Karl Pearson’s method-sai-2:0.332)
Rainfall Agri pro

22 40
24 36
26 25
28 50
30 48
32 46
34 38
Slide 12
Rainfall Agri pro (X-X')=A (Y-Y')=B A*B
22 40 -6 -0.4 2.6
24 36 -4 -4.4 17.7
26 25 -2 -15.4 30.9
28 50 0 9.6 0.0
30 48 2 7.6 15.1
32 46 4 5.6 22.3
34 38 6 -2.4 -14.6
MEAN 28 40.43 ∑A*B= 74.0
SD 4.3 8.6
Covariance (∑A*B)/n-1 12.33
r covar/(sd(x)*sd(y)) 0.332
Slide 13
x y
57 10
42 60
40 30
33 41
42 29
45 27
42 27
44 19
40 18
56 19
44 31
43 29
Slide 14
Age Leave
30 1
32 0
35 2
40 5
48 2
50 4
52 6
55 5
57 7
61 8
Slide 15
Class Examples-2.18-
2.19
Slide 16
2.19
Slide 17
Slide 18
Slide 19
Spearman’s Rank Correlation
• Used when variables are not capable of

quantitative measurement
• When Data can be arranged in a serial order
• The Spearman’s Rank Correlation is given by:
Slide 20
Spearman’s Rank Correlation (8.42/0.51)
Ranks of 15 students in courses A and B
pg 8.42 Rank in A (x) Rank in B (y) d=x-y d2

1 10 -9 81
2 7 5 25
3 2 1 1
4 6 2 4
5 4 1 1
6 8 -2 4
7 3 4 16
8 1 7 49
9 11 -2 4
10 15 -5 25
11 9 2 4
12 5 7 49
13 14 -1 1
14 12 2 4
15 13 2 4
∑d2 272
n 15 n-sqr 225
0.514
Slide 21
Ranking of two judges in a beauty contest
Judge-1 (x) Judge-2 (y)

1 12
2 9
3 6
4 10
5 3
6 5
7 4
8 7
9 8
10 2
11 11
12 1
Slide 22
Adv ('000 Rs.) Sales (lakhs Rs)
39 47
65 53
62 58
90 86
82 62
75 68
25 60
98 91
36 51
78 84
Slide 23
Advertising and Sales with quantitative data
Adv ('000 Rs.) Sales (lakhs Rs) Rank (Adv) Rank (Sales)
39 47 8 10
65 53 6 8
62 58 7 7
90 86 2 2
82 62 3 5
75 68 5 4
25 60 10 6
98 91 1 1
36 51 9 9
Slide 24
78 84 4 3
End of Unit:3.20
Slide 25
Unit 3:3.21-3.23
Slide 26
Chapter 14, Part A
Simple Linear Regression
Simple Linear Regression Model

Least Squares Method
Slide 27
◼ Managerial decisions often are based on the

relationship between two or more variables.
◼ Regression analysis can be used to develop an
equation showing how the variables are related.
◼ The variable being predicted is called the dependent
variable and is denoted by y.
◼ The variables being used to predict the value of the
dependent variable are called the independent
variables and are denoted by x.
Slide 28
◼ Simple linear regression involves one independent

variable and one dependent variable.
◼ The relationship between the two variables is
approximated by a straight line.
◼ Regression analysis involving two or more
independent variables is called multiple regression.
Slide 29
Estimated Simple Linear Regression Equation
The estimated simple linear regression equation
ŷ = b0 + b1 x
• The graph is called the estimated regression line.

• b0 is the y intercept of the line.
• b1 is the slope of the line.
• ŷ is the estimated value of y for a given x value.
Slide 30
Least Squares Criterion
min  (y i − y i ) 2
where:
yi = observed value of the dependent variable
for the ith observation
y^i = estimated value of the dependent variable
for the ith observation
Slide 31
Slope for the Estimated Regression Equation
b1 =  ( x − x )( y − y )
i i
 (x − x )
i
2
where:
xi = value of independent variable for ith
observation
yi = value of dependent variable for ith
_ observation
x = mean value for independent variable
_
y = mean value for dependent variable
Slide 32
y-Intercept for the Estimated Regression Equation
b0 = y − b1 x
Slide 33
Slide 34
Slide 35
Example: Reed Auto Sales

Reed Auto periodically has a special week-long sale.
As part of the advertising campaign Reed runs one or
more television commercials during the weekend
preceding the sale. Data from a sample of 5 previous
sales are shown on the next slide.
Slide 36
Example: Reed Auto Sales
Number of Number of
TV Ads (x) Cars Sold (y)
1 14
3 24
2 18
1 17
3 27
Sx = 10 Sy = 100
x=2 y = 20
Slide 37
Estimated Regression Equation
Slope for the Estimated Regression Equation
b1 =  ( x − x )( y − y ) 20
i i
= =5
 (x − x )i
2
4
y-Intercept for the Estimated Regression Equation

b0 = y − b1 x = 20 − 5(2) = 10
Estimated Regression Equation
yˆ = 10 + 5x
Slide 38
Find the regression equation. If adv increases by
7.5%, sales growth? (Sai-8:a=0.06,b=.70,incr in sales=5.35%)
%Adv %Sales
1 1
3 2
4 2
6 4
8 6
9 8
11 8
14 9
Slide 39
Slide 40
Slide 41
2.23
Slide 42
2.23
Slide 43
2.23
Slide 44
2.23
Slide 45
2.23
Slide 46
2.23
Slide 47
2.23
Slide 48
2.23
Slide 49
2.23
Slide 50
2.23
Slide 51
End of Unit 3:3.21-3.23
Slide 52

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Unit:3.18, 3.

Often a manager or decision maker is interested in

Two descriptive measures of the relationship

The covariance is a measure of the linear association

Positive values indicate a positive relationship.

Negative values indicate a negative relationship.

The covariance is computed as follows:

Correlation is a measure of linear association and not

Just because two variables are highly correlated, it

The correlation coefficient is computed as follows:

The coefficient can take on values between -1 and +1.

Values near -1 indicate a strong negative linear

Values near +1 indicate a strong positive linear

The closer the correlation is to zero, the weaker the

◼ Example: Golfing Study

◼ Example: Golfing Study

◼ Example: Golfing Study

Rainfall Agri pro

MEAN 28 40.43 ∑A*B= 74.0

Covariance (∑A*B)/n-1 12.33

• Used when variables are not capable of

Ranks of 15 students in courses A and B

pg 8.42 Rank in A (x) Rank in B (y) d=x-y d2

Ranking of two judges in a beauty contest

Judge-1 (x) Judge-2 (y)

Adv ('000 Rs.) Sales (lakhs Rs)

Advertising and Sales with quantitative data

Simple Linear Regression Model

◼ Managerial decisions often are based on the

◼ Simple linear regression involves one independent

The estimated simple linear regression equation

• The graph is called the estimated regression line.

Least Squares Criterion

Slope for the Estimated Regression Equation

y-Intercept for the Estimated Regression Equation

Example: Reed Auto Sales

Example: Reed Auto Sales

Slope for the Estimated Regression Equation

y-Intercept for the Estimated Regression Equation

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