CORRELATION AND

MULTIPLE REGRESSION
ANALYSIS
The application of correlation analysis is to
measure the degree of association between two
sets of quantitative data.
The degree of relationship between two
variables is known as correlation coefficient
It has a value ranging from 0 (no correlation) to
1 (perfect positive correlation), or -1 (perfect
negative correlation).
Correlation can be done for any two sets of data
even with out any relevance.

How are sales of seven up correlated with sales of
Mirinda?
How is the advertising expenditure correlated with other
promotional expenditure?
Are daily ice cream sales correlated with daily maximum
temperature?

Correlation does not necessarily mean there is a causal
effect.
Given any two strings of numbers, there will be some
correlation among them. It does not imply that one
variable is causing a change in another, or is dependent
upon another.

Positive Correlation
wt
0
10
20
30
40
50
60
70
80
90
0 50 100 150 200
Negative Correlation
0
10
20
30
40
50
60
70
80
0 20 40 60 80 100


In regression analysis, we have dependent
variable and independent variable
Prediction one (dependent) variable with
other variable (Independent) variables.
The main objective of regression analysis is
to explain the variation in one variable (called
the dependent variable), based on the
variation in one or more other variables
(called the independent variables).


Regression analysis examines associative relationships between a
metric dependent variable and one or more independent variables
in the following ways:

Determine whether the independent variables explain a significant
variation in the dependent variable: whether a relationship exists.

Determine how much of the variation in the dependent variable can
be explained by the independent variables: strength of the
relationship.
The applications areas are in explaining variations in sales of a
product based on advertising expenses, or number of sales people,
or number of sales offices, or on all the above variables.

Determine the structure or form of the relationship: the
mathematical equation relating the independent and dependent
variables.

Predict the values of the dependent variable.




If there is only one dependent variable and
one independent variable is used to explain
the variation in it, then the model is known
as a simple linear regression.

If multiple independent variables are used to
explain the variation in a dependent
variable, it is called a multiple regression
model.


Y = a + b
1
x
1
+ b
2
x
2
+.+ b
n
x
n


where y is the dependent variable and
x
1
, x
2
, x
3
.x
n
are the independent variables expected to be related to y
and expected to explain or predict y.
b
1
, b
2
, b
3
b
n
are the partial regression coefficients of the respective
independent variables, which will be determined from the input
data.

The interpretation of the partial regression coefficient, b
1
, is that it
represents the expected change in Y when X
1
is changed by one unit
but X
2
is held constant or otherwise controlled.
If you increase one unit in x
1
, Y will get increase or decrease b
1
times
Likewise, b
2
represents the expected change in
Y for a unit change in X
2
, when X
1
is held constant. Thus, calling b
1

and b
2
partial regression coefficients is appropriate.
It can also be seen that the combined effects of X1 and X2 on Y are
additive. In other words, if X1 and X2 are each changed by one
unit, the expected change in Y would be (b1+b2).



Statistics in Multiple Regression
analysis
F test. The F test is used to test the null hypothesis.
This is equivalent to testing the null hypothesis .i.e.
P' value should be less than 0.05 (95% confidence)
or 0.1 (90% confidence level).
Adjusted R
2
. R
2
, coefficient of multiple
determination: Percentage or proportion of the total
variance in Y explained by all the independent
variables in the regression equation. It indicates how
well the independent variables can predict the
dependent variable .
The output also gives you the results of a t test for
the significance of each variable in the model. It will
test whether each individual independent variable
can predict the dependent variable .
Regression Model establishes the
relationship between loyalty and satisfaction
& purchase
Loyalty y = a + B
1
X
1
+ B
2
X
2
.
X
1
= Satisfaction
X
2
= Purchase
Multiple Regression
Table 17.3
Multiple R 0.97210
R
2
0.94498
Adjusted R
2
0.93276
Standard Error 0.85974

ANALYSIS OF VARIANCE
df Sum of Squares Mean Square

Regression 2 114.26425 57.13213
Residual 9 6.65241 0.73916
F = 77.29364 Significance of F = 0.0000

VARIABLES IN THE EQUATION
Variable b SE
b
Beta () T Significance
of T
satisfaction 0.28865 0.08608 0.31382 3.353 0.0085
Purchase 0.48108 0.05895 0.76363 8.160 0.0000
(Constant) 0.33732 0.56736 0.595 0.5668
Loyalty y = 0.33732 + 0.28865 X
1
+
0.48108X
2.
(satisfaction)
(purchase)