Simple liner regression

• Linear regression is a predictive analysis algorithm. It is a statistical

method that determines the correlation between dependent and
independent variables. This type of distribution forms a line and hence
called a linear regression. It is one of the most common types of
predictive analysis.
• It is used to predict the dependent variable’s value when the
independent variable is known. A regression graph is a scatterplot
that depicts the arrangement of a dataset; x and y are the variables.
The nearest data points that represent a linear slope form the
regression line. Thus, plotting and analyzing a regression line on a
regression graph is called linear regression.
The below graph represents simple linear regression, modeling the relationship
between house size (independent variable) and house price (dependent variable). As
observed in the visualization, the larger the house, the more expensive it is.
visualization, the larger the house, the more expensive it is
• Correlation coefficient
• One dependent variable (interval or ratio)
• One independent variable (interval or ratio or dichotomous)
Assumptions of Linear regression

• For each variable, consider a number of valid cases, mean and standard deviation.
• For each model, consider: regression coefficients, correlation matrix, part and
partial correlations, multiple R, R2, adjusted R2, change in R2, standard error of
the estimate, analysis-of-variance table, predicted values and residuals, 95-per
cent-confidence intervals for each regression coefficient, variance-covariance
matrix, variance inflation factor, tolerance, Durbin-Watson test, distance measures
(Mahalanobis, Cook and leverage values), DfBeta, DfFit, prediction intervals and
case-wise diagnostic information
• Consider various plots like scatterplots, histograms, partial plots and probability
plots.
• Variable data: the data like religion, gender, the cast should be measured
quantitatively using some dummy variables.
 Why use Linear regression?
• Linear regression allows you to predict one variable using another one. In
cases of financial aspects, you can predict your sales based on your
investments in advertisements, product development, etc.
• Linear regression can help you predict the changes in pricing. Let’s say you
have increased the price of a product, Linear regression can help you
determine if the consumption drops and if yes then how much.
• You can analyze risks in your companies using Linear regression.
• As you can predict the variables, it makes it easy for you to manage the
independent variables which are going to directly influence the dependent
variables.
Regression Analysis
• Regression analysis is a tool for building mathematical and statistical models
that characterize relationships between a dependent (ratio) variable and one
or more independent, or explanatory variables (ratio or categorical), all of
which are numerical.
• Simple linear regression involves a single independent variable.
• Multiple regression involves two or more independent variables.

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Simple Linear Regression
• Finds a linear relationship between:
– one independent variable X and
– one dependent variable Y
• First prepare a scatter chart to verify the data has a linear trend.
• Use alternative approaches if the data is not linear.

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Linear regression
• Used to predict the relationship between two variables by applying a linear
equation to observed data.
• There are two types of variable, one variable is called an independent variable,
and the other is a dependent variable.
• Linear regression is commonly used for predictive analysis.
• The main idea of regression is to examine :
– Does a set of predictor variables do a good job in predicting an outcome
(dependent) variable?
– Which variables are significant predictors of the outcome variable?

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Examples of Linear Regression
• company's sales go up and down depending on changes in GDP.
• Sales and spending on advertisement
• Temperature changes: As the sun rises, temperature increases,
and as it sets, temperature decreases.
• The weight of the person is linearly related to their height. So, this
shows a linear relationship between the height and weight of the
person. According to this, as we increase the height, the weight of
the person will also increase.

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 Linear Regression Equation
• The measure of the relationship between two variables is shown by the correlation
coefficient. The range of the coefficient lies between -1 to +1. This coefficient shows
the strength of the association of the observed data between two variables.
• Linear Regression Equation is given below:
• Y=a+bX
• where X is the independent variable and it is plotted along the x-axis
• Y is the dependent variable and it is plotted along the y-axis
• Here, the slope of the line is b, and a is the intercept (the value of y when x = 0).

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Linear Regression Formula

• As we know, linear regression shows the linear relationship

between two variables. The equation of linear regression is similar
to that of the slope formula. We have learned this formula before
in earlier classes such as a linear equation in two variables. Linear
Regression Formula is given by the equation
• Y= a + bX

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Key Ideas of Linear Regression
• Correlation explains the interrelation between variables within the
data.
• Variance is the degree of the spread of the data.
• Standard deviation is the dispersion of mean from a data set by
studying the variance’s square root. standard deviation is the
square root of the variance, variance is the average of the squared
difference of each data point from the mean.
• Residual (error term) is the actual value found within the dataset
minus the expected value that is predicted in linear regression.

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 R-squared
• R-squared measures the strength of the relationship between your model and the
dependent variable on a convenient 0 – 100% scale.
• R-squared (R2) is a statistical measure that represents the proportion of the
variance for a dependent variable that’s explained by an independent variable in
a regression model.
• Whereas correlation explains the strength of the relationship between an
independent and a dependent variable, R-squared explains the extent to which
the variance of one variable explains the variance of the second variable. So, if
the R2 of a model is 0.50, then approximately half of the observed variation can be
explained by the model’s inputs.

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Find R square- Coefficient of Dtermination

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Copyright © 2021 Pearson Education Ltd.
• Correlation and regression are both techniques used to study the
relationship between variables.
• Correlation quantifies the strength of a linear relationship between
two variables.
• Regression expresses the relationship between variables as an
equation.

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Linear regression through excel
• The Equation
• Mathematically, linear regression uses the easy-to-interpret formula listed below, followed by
a detailed breakdown of what each of the formula’s variables represents:
• y = a + bx
• (y) Dependent Variable: This variable depends on the other measured factors to the right of
the equals sign.
• (a) Regression Intercept Term: The constant value of the dependent variable when the
independent variable x is set to zero—in other words, the point where the function crosses
over the y-axis.
• (b) Regression Slope Coefficient: The value that determines the slope of the line (i.e., the
change in the independent x variable for a unit change in the independent y variable).
• (x) Independent Variable: The variable used to predict the value of another variable; because
it’s used to predict the value of the dependent variable, x is also referred to as the predictor.
The Equation
The Shape Of A Linear Regression

• When plotted on a graph, the shape of a linear regression takes the

form of a straight line with any valid slope value—essentially, the
angle or direction at which the line banks:
• Positive Slope: Means that y increases as x increases, and the
function banks upwards from left to right.
• Negative Slope: Means that y decreases as x increases, and the
function banks downwards from left to right.
• Zero Slope: Means that y is a constant that doesn’t change; basically a
horizontal line.
Step 1: Input Historical Values Into Excel
Step 2: Plot Your Historical Data Using A Scatter Plot
Step 3: Place Your Trendline
Step 4: Calculate Your Prediction
Simple linear regression calculation
• The method of least squares from regression analysis is used to find
the trend line of best fit to a time series
• data. The regression trend line (y) is defined by the following equation.
• ˆy = a + bx
• where ˆy = predicted value of the dependent variable;
• a = y-axis intercept;
• b = slope of the regression line (or the rate of change in y for a given
change in x);
• x = independent variable (which is time in this case).
 Regression Coefficient

(a) Fit a straight line trend to these figures.

(b) Plot these figures on a graph and show the trend line.
(c) Estimate the production in 2004.
 Example 2
• The following table relates to the tourist arrivals (in millions) during 1994 to
2000 in India:

Fit a straight line trend by the method of least squares and estimate the number of tourists
that would arrive in the year 2004.
What Are Forecasting Methods?

• Forecasting is estimating the magnitude of uncertain future events

and providing different results with different assumptions. Top
forecasting methods include Qualitative Forecasting (Delphi Method,
Market Survey, Executive Opinion, Sales Force Composite) and
Quantitative Forecasting (Time Series and Associative Models).
Forecasting Methods Explained
• The forecasting methods are the techniques of processes followed for the purpose of
making future decisions related to sales, financing, pricing, investment, project feasibility
etc. The methods depend on various types of inputs, which may be historical data,
current market scenarios, past experiences regarding similar situations, or the ability to
identify current trends.
• There are possible estimates that are made by using sales forecasting methods or any
other related ones that can be used to predict what may happen in the future and based
on that, different decisions related to production planning, prices, sale targets, etc, are
made.
• Traders, investors, and analysts frequently use a wide variety of models that can help in
such predictions and have already proved to do the same efficiently. However, these
models and methods are not only restricted to manufacturing and production. They are
also used for predictions and forecasting in fields like economic outlook, business trends,
weather conditions, technological usage and so on.
• It is always essential that the management and stakeholders understand the business and
current situations well in order to make a forecast because the choice of sales forecasting
methods or any other similar ones is crucial. If this is not done correctly, then it will lead
to a collection of incorrect types of data, and analysis will not give fruitful results.
Types
• There are different types of sales or financial forecasting
methods can be broadly classified into:
• Qualitative Methods – These methods are based on emotions,
intuitions, judgments, personal experiences, and opinions. This means
that there is no math involved in qualitative forecasting
methods. Delphi Method, Market Survey, Executive Opinion,
SalesForce Composite are part of this type of forecasting.
• Quantitative Methods – These methods depend wholly on
mathematical or quantitative models. The outcome of this method
relies entirely on mathematical calculations. Simple linear regression,
Moving average, Naïve method, Exponential smoothening,Time
Series and Associative Models are a part of this type of forecasting.
Methods Of Forecasting

• #1 – Delphi Method
• The agreement of a group of experts in consensus is required to
conclude in the Delphi method. This method involves a discussion
between experts on a given problem or situation. An argument or
brainstorming is done to complete that everyone involved in the
debate agrees to.
• https://www.investopedia.com/terms/d/delphi-method.asp
• #2 – Market Survey-In a market survey, interviews and surveys of customers are
made to understand the task of the customer and tap the trend well in advance to
deliver the right product or service according to the changing needs of the
customer.
• #3 – Executive/expert Opinion-As the name suggests, the executives or managers
are involved in such forecasting. This method is very similar to the Delphi method;
however, the only difference here is that the executives may or may not be experts
of the matter in question, albeit they have the experience to understand the
problem or situation and formulate a forecasting method that would bring out the
best possible result.
• #4 – Sales Force Composite-The information and intuition of the salesperson
determine the needs of the customer and estimate the sales in the particular
region or area assigned to the salesperson. This information is vital in forecasting
the needs of the customer, which can be used to make necessary changes in the
business to meet the needs of the customer and identify the sales volumes
beforehand.
• #5 – Time Series Models-Time series models look at historical data and identify patterns
in the past data to arrive at a point in the future based on these historical values. Since
the historical data has a pattern, it becomes evident that the data in the future should
also have a pattern, and this method looks at cracking the pattern in the future so that
there is very little deviance from the actual calculations and the outcomes in the real
world. Below is the example of a time series model.
• Time series refers to a chain of data points observed due to monitoring and recording in a
time order over a specific period.
• Its components are the secular trend, seasonal trend, cyclical variations, and irregular
variations.
• Its analysis derives meaningful statistics, interprets trends, identifies patterns, and
contributes to decision making. Examples of its application include budgetary analysis
and stock market analysis.
• Its applications include various models generated to forecast data and induce strong
strategic decision-making. Examples include weather forecasting and sales forecasting.
• #6 – Associative Models-Associative models look at the variable that
is being forecasted as being related to other variables in the system,
which means each variable is associated with the other variable in the
system. The forecast projections are made based on these
associations.
• Thus, the above are the sales or financial forecasting
methods commonly followed for the process. They outline the basic
approach to the situation, the type of data obtained, in what way that
type of data is helpful in order to achieve the target, and what kind of
result we can expect by using this method.
 Need of forecasting
• There are various important objectives behind this entire process of different forecasting methods and estimation. Let us dive
deeper into the details.
• The main objective is to track whether the policies and procedures implemented by the management in terms of production
planning, prices, marketing, customer retention, etc are really giving the desired results of not. The evaluation of current data
for the purpose of future estimation will find loopholes, if any.
• These different forecasting methods help in setting a benchmark for the business and compare their own current
performance and future expectations with that of their peer companies. This acts as a guide to identify any cons in the process
and take necessary action depending on the urgency of the situation.
• This concept also gives an idea about what are the possible impact, be it positive or negative, that the company might have in
future related to any changes that are being implemented in various levels of the organization.
• The statistical forecasting methods are beneficial for management, shareholders, lenders, and other stakeholders who want
to have substantial knowledge about the business going forward. This is because they plan to put their hard-earned money
into the company with the hope of a reasonable return. Thus, these methods help them to make crucial decisions.
• Forecasting enables a business to take the necessary steps to achieve a particular goal by providing vital information regarding
future events and its occurrence and magnitude. Forecasting can be either Qualitative or Quantitative, depending on the
information gathered and its nature, usually subjective or objective, and as a result, is based on mathematical calculations or
no mathematical calculations at all. The management decides on the best forecasting method to be used according to the
business. It is based on internal and external factors and whether the external factors are controllable or uncontrollable.
• Uncontrollable factors can be government policies, competitors’ strategies, natural calamities, and so on. Quantitative
forecasting uses mathematical models to arrive at the forecasting results, and it also relies on historical data to back the
findings. Qualitative forecasting uses emotions, intuition, past experiences, and values. It is an essential procedure in business
that enhances business operations and ensures the functions can be performed smoothly in the ever-changing business
environment.
Moving Averages
• If we attempt to observe the movement of some variable values over
a period of time and try to project this movement into the future,
then it is essential to smooth out first the irregular pattern in the
historical values of the variable, and later use this as the basis for a
future projection. This can be done by using the technique of moving
averages.
• The moving averages which serve as an estimate of the next period’s
value of a variable given a period of length n are expressed as
Exponential Smoothing Method

• Exponential smoothing weighs past data from previous time periods

with exponentially decreasing importance in the forecast so that the
most recent data carries more weight in the moving average.
• Simple Exponential Smoothing The forecast is made up of the actual
value for the present time period Xt multiplied by a value between 0
and 1 (the exponential smoothing constant) referred to as α (not the
same as used for a Type I error) plus the product of the present time
period forecast Ft and (1 – α). The formula is stated algebraically as
follows:
Example
• A firm uses simple exponential smoothing with α = 0.1 to forecast
demand. The forecast for the week of February 1 was 500 units
whereas actual demand turned out to be 450 units.
• (a) Forecast the demand for the week of February 8.
• (b) Assume the actual demand during the week of February 8 turned
out to be 505 units. Forecast the demand for the week of February
15. Continue forecasting through March 15, assuming that
subsequent demands were actually 516, 488, 467, 554, and 510 units.