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REGRESSION ANALYSIS

Regression Analysis
It is the study of the functional relationship between variables. It is one of the most commonly used tools for business analysis for prediction and forecasting.
It is easy to use and applies to many situations.

Regression Types
Simple Regression: The regression analysis confined to only study of two variables. Multiple Regression: The regression analysis involving study of more than two variables.

Dependant/Explained Variable: the single variable being explained/ predicted by the regression model. In other words variable whos value is to be predicted.

Independent variable: The explanatory variable(s) used to predict the dependant variable.
Coefficients (): values, computed by the regression tool, reflecting relationship between explanatory/independent variable and dependent variable. Residuals (): the portion of the dependent variable that isnt explained by the model; the model under and over predictions.

Regression Analysis
Linear Regression: When the relationship between the dependent variable and an independent variable is linear, the technique of prediction is known as Simple Linear Regression or Straight-line relationship represented as follows: y=ax+b

Simple Linear Regression Model


Only one independent variable, x Relationship between x and y is described by a linear function Changes in y are assumed to be caused by changes in x

Types of Regression Models

FORMULAS
Regression Coefficients:byx = n XY- (X) (y) n (X2 ) - (X)2
bxy = n XY- (X) (y) n (Y2 ) - (Y)2

Regression Equations

`Y on X: (Y-Y) = byx (X-X)


X on Y: (X-X) = bxy (Y-Y)

Estimated Regression Model

Estimated (or predicted) y value

Estimate of the regression intercept

Estimate of the regression slope Independent variable

yab x

The individual random error terms ei have a mean of zero

Simple Linear Regression Example


A real estate agent wishes to examine the relationship between the selling price of a home and its size (measured in square feet)
A random sample of 10 houses is selected Dependent variable (y) = house price in
$1000s

Independent variable (x) = square feet

House Price in $1000s (y) 245 312 279 308 199 219 405 324 319

Square Feet (x) 1400 1600 1700 1875 1100 1550 2350 2450 1425

Sample Data

255

1700

CALCULATION

CALCULATION
Regression Coefficients:byx = n XY- (X) (y) n (X2 ) - (X)2 = 1725000 = 0.10976 15715000

Y on X: (Y-Y) = byx (X-X) = Y= 0.10976X +98.24833

Output. . .
The regression equation is:
house price 98.24833 0.10977(squarefeet)

Coefficient s Intercept 98.24833

Regression Slope

0.10977

Graphical Presentation
House price model: scatter plot and regression line
450

House Price ($1000s)

400 350 300 250 200 150 100 50 0 0 500 1000 1500 2000 2500 3000 Square Feet

Slope = 0.10977

Intercept = 98.248

house price 98.24833 0.10977(squarefeet)

Interpretation of the Intercept, b0


house price 98.24833 0.10977(squarefeet)
a is the estimated average value of Y when the value of X is zero (if x = 0 is in the range of observed x values)
Here, no houses had 0 square feet, so a = 98.24833 just indicates that, for houses within the range of sizes observed, $98,248.33 is the portion of the house price not explained by square feet

Interpretation of the Slope Coefficient, b1


house price 98.24833 0.10977(squarefeet)

b measures the estimated change in the average value of Y as a result of a oneunit change in X.
Here, b = .10977 tells us that the average value of a house increases by .10977($1000) = $109.77, on average, for each additional one square foot of size

Example: House Prices


House Price in $1000s (y) 245 312

Square Feet (x)


1400 1600

Estimated Regression Equation:


house price 98.25 0.1098 (sq.ft.)

279
308 199 219 405

1700
1875 1100 1550 2350

Predict the price for a house with 2000 square feet

324
319 255

2450
1425 1700

Example: House Prices


Predict the price for a house with 2000 square feet:

house price 98.25 0.1098 (sq.ft.) 98.25 0.1098(200 0) 317.85


The predicted price for a house with 2000 square feet is 317.85($1,000s) = $3,17,850

ACTIVITY 1
Find both the regression equation from the following data:X=60; Y=40; X2=4160; Y2=1720; XY=1150; N=10

ACTIVITY 2
The table gives age of cars and annual maintenance costs. Obtain the regression equation for costs related to age. Also estimate the annual maintenance cost for a 10 year old car.
Age of Cars (in yrs) 2 4 6 8 Maintenance Cost (Rs.) 10 20 25 30

FORMULAS FOR REGRESSION COEFFICIENT


In terms of Covariance and Variance

In terms of Correlation Coefficient

ACTIVITY 3

Find both the regression coefficient, if SD(X)= 4 ; SD(Y)=3 and Coefficient of Correlation between X & Y is 0.8.

ACTIVITY 4
Compute 2 lines of regression on the basis of following information.
Adv Exp (X) Mean SD 10 3 Sales (Y) 90 12

Also note Karl Pearsons Coefficient of Correlation between Advertisement Exp & Sales is 0.8. Also estimate the advertisement expenditure required to attain sales target of Rs.120 lakhs.

Standard Error of Estimate


The standard error of estimate measures the scatter or spread of the actual values around the regression line. Formulas SE yx= ( Y2- aY-bXY)
n SE xy= (X2- aX-bXY) n

ACTIVITY 5
For 10 observations on price(X) and supply(Y) the following data were obtained. Find out the line of regression of Y on X and estimate the supply when price is 16 units and find out the standard error of estimate. X=130; Y=220; X2=2288; Y2=5506; XY=3467.

ACTIVITY 6
For a given set of bi variate data, the following results were obtained: X=5000; Y=10,000; X2=260000; Y2=10,40,000; XY=516000; n=100 Calculate following: Find the predicted value of Y when X=60. What is the SE of estimate in the reg. Y on X.

Properties of Regression Coefficients


Property 1
The Coefficient of Correlation and the two regression coefficients have the same signs.

Property 2
If one of the regression coefficient is greater than unity then other must be less than unity.