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Chapter 13
Simple Linear Regression
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-1
Learning Objectives
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-2
Correlation vs. Regression
A scatter plot (or scatter diagram) can be
used to show the relationship between two
numerical variables
Correlation analysis is used to measure
strength of the association (linear
relationship) between two variables
Correlation is only concerned with strength of
the relationship
No causal effect is implied with correlation
Correlation was first presented in Chapter 3
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-3
Regression Analysis
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-4
Simple Linear Regression
Model
Only one independent variable, X
Relationship between X and Y is described
by a linear function
Changes in Y are related to changes in X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-5
Types of Relationships
Linear relationships Curvilinear relationships
Y Y
X X
Y Y
X X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-6
Types of Relationships
Strong relationships Weak relationships
Y Y
X X
Y Y
X X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-7
Types of Relationships
No relationship X
X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-8
The Linear Regression Model
Population Random
Population Independent Error
Slope
Y intercept Variable term
Coefficient
Dependent
Variable
Yi = β 0 + β1X i + ε i
Linear component Random Error
component
Y Yi = β 0 + β1X i + ε i
Observed Value
of Y for Xi
εi Slope = β1
Predicted Value Random Error
of Y for Xi for this Xi value
Intercept = β0
Xi X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-10
Linear Regression Equation
The simple linear regression equation provides an
estimate of the population regression line
Estimated (or
predicted) Y Estimate of the Estimate of the
value for regression regression slope
observation i intercept
Value of X for
Ŷi = b 0 + b1X i
observation i
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-11
The Least Squares Method
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-12
Finding the Least Squares
Equation
The coefficients b0 and b1 , and other regression
results in this chapter, will be found using Excel
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-13
Interpretation of the
Intercept and the Slope
b0 is the estimated mean value of Y when the
value of X is zero
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-14
Linear Regression Example
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-15
Linear Regression Example
Data
House Price in $1000s Square Feet
(Y) (X)
245 1400
312 1600
279 1700
308 1875
199 1100
219 1550
405 2350
324 2450
319 1425
255 1700
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-16
Linear Regression Example
Scatterplot
House price model: scatter plot
450
400
350
House Price ($1000s)
300
250
200
150
100
50
0
0 500 1000 1500 2000 2500 3000
Square Feet
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-17
Linear Regression Example
Using Excel
Tools
--------
Data Analysis
--------
Regression
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-18
Linear Regression Example
Excel Output
Regression Statistics
Multiple R 0.76211
The regression equation is:
R Square 0.58082 house price = 98.24833 + 0.10977 (square feet)
Adjusted R Square 0.52842
Standard Error 41.33032
Observations 10
ANOVA df SS MS F Significance F
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-19
Linear Regression Example
Graphical Representation
House price model: scatter plot and regression line
450
400
350 Slope
House Price ($1000s)
300 = 0.10977
250
200
150
100
Intercept 50
= 98.248 0
0 500 1000 1500 2000 2500 3000
Square Feet
house price = 98.24833 + 0.10977 (square feet)
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-20
Linear Regression Example
Interpretation of b0
house price = 98.24833 + 0.10977 (square feet)
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-21
Linear Regression Example
Interpretation of b1
house price = 98.24833 + 0.10977 (square feet)
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-22
Linear Regression Example
Making Predictions
Predict the price for a house with 2000 square feet:
= 98.25 + 0.1098(2000)
= 317.85
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-23
Linear Regression Example
Making Predictions
When using a regression model for prediction, only
predict within the relevant range of data
Relevant range for
interpolation
450
400
350
House Price ($1000s)
300
Do not try to
250 extrapolate beyond
200 the range of
150 observed X’s
100
50
0
Statistics 0 500Using1000
for Managers Microsoft1500
Excel, 5e ©2000 2500 Inc.
2008 Prentice-Hall, 3000 Chap 13-24
Measures of Variation
Total variation is made up of two parts:
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-25
Measures of Variation
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-26
Measures of Variation
Y
Yi ∧ ∧
SSE = ∑(Yi - Yi )2 Y
_
SST = ∑(Yi - Y)2
∧
Y ∧ _
_ SSR = ∑(Yi - Y)2 _
Y Y
Xi X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-27
Coefficient of Determination, r2
The coefficient of determination is the portion of
the total variation in the dependent variable that
is explained by variation in the independent
variable
The coefficient of determination is also called r-
squared and is denoted as r2
SSR regression sum of squares
r =
2
=
SST total sum of squares
0 ≤r ≤1 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-28
Coefficient of Determination, r2
Y
r2 = 1
X
r =1
2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-29
Coefficient of Determination, r2
Y
0 < r2 < 1
X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-30
Coefficient of Determination, r2
r2 = 0
Y
No linear relationship between X
and Y:
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-31
Linear Regression Example
Coefficient of Determination, r2
Regression Statistics
SSR 18934.9348
Multiple R 0.76211 r =2
= = 0.58082
R Square 0.58082 SST 32600.5000
Adjusted R Square 0.52842
Standard Error 41.33032
58.08% of the variation in house
Observations 10 prices is explained by variation in
square feet
ANOVA df SS MS F Significance F
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-32
Standard Error of Estimate
The standard deviation of the variation of observations
around the regression line is estimated by
SSE ∑ i i
(Y − Yˆ ) 2
SYX = = i =1
n−2 n−2
Where
SSE = error sum of squares
n = sample size
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-33
Linear Regression Example
Standard Error of Estimate
Regression Statistics
Multiple R
R Square
0.76211
0.58082
S YX = 41.33032
Adjusted R Square 0.52842
Standard Error 41.33032
Observations 10
ANOVA df SS MS F Significance F
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-34
Comparing Standard Errors
SYX is a measure of the variation of observed
Y values from the regression line
Y Y
small s YX X large s YX X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-35
Assumptions of Regression
L.I.N.E
Linearity
The relationship between X and Y is linear
Independence of Errors
Error values are statistically independent
Normality of Error
Error values are normally distributed for any given value
of X
Equal Variance (also called homoscedasticity)
The probability distribution of the errors has constant
variance
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-36
Residual Analysis
ei = Yi − Yˆi
The residual for observation i, ei, is the difference between its
observed and predicted value
Check the assumptions of regression by examining the residuals
Examine for Linearity assumption
Evaluate Independence assumption
Evaluate Normal distribution assumption
Examine Equal variance for all levels of X
Graphical Analysis of Residuals
Can plot residuals vs. X
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-37
Residual Analysis for Linearity
Y Y
x x
residuals
x residuals x
residuals
X
residuals
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-39
Checking for Normality
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-40
Residual Analysis for
Equal Variance
Y Y
x x
residuals
x residuals x
Residuals
3 284.85348 -5.853484 20
4 304.06284 3.937162 0
5 218.99284 -19.99284 0 1000 2000 3000
-20
6 268.38832 -49.38832
-40
7 356.20251 48.79749
-60
8 367.17929 -43.17929
Square Feet
9 254.6674 64.33264
10 284.85348 -29.85348 Does not appear to violate
any regression assumptions
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-42
Measuring Autocorrelation:
The Durbin-Watson Statistic
Used when data are collected over time to
detect if autocorrelation is present
Autocorrelation exists if residuals in one
time period are related to residuals in another
period
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-43
Autocorrelation
Autocorrelation is correlation of the errors (residuals) over time
15
10
Here, residuals suggest a Residuals 5
cyclic pattern, not 0
random -5 0 2 4 6 8
-10
-15
Time (t)
∑i
e 2
i =1
D less than 2 may signal positive
autocorrelation, D greater than 2 may
signal negative autocorrelation
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-45
The Durbin-Watson Statistic
H0: positive autocorrelation does not exist
H1: positive autocorrelation is present
Calculate the Durbin-Watson test statistic = D
(The Durbin-Watson Statistic can be found using Excel)
Find the values dL and dU from the Durbin-Watson table
(for sample size n and number of independent variables k)
0 dL dU 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-46
The Durbin-Watson Statistic
Example with n = 25: 160
140
Excel output:
120
Durbin-Watson Calculations
100
Sum of Squared Difference 3296.18
y = 30.65 + 4.7038x
Sales
of Residuals 80
2
60 R = 0.8976
Sum of Squared Residuals 3279.98
40
Durbin-Watson Statistic 1.00494
20
0
0 5 10 15 20 25 30
n Tim e
∑(e i − ei−1 ) 2
3296.18
D= i=2
n
= = 1.00494
3279.98
∑ei
2
i=1
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-47
The Durbin-Watson Statistic
Here, n = 25 and there is k = 1 independent variable
Using the Durbin-Watson table, dL = 1.29 and dU = 1.45
D = 1.00494 < dL = 1.29, so reject H0 and conclude that
significant positive autocorrelation exists
Therefore the linear model is not the appropriate model to
predict sales
Decision: reject H0 since
D = 1.00494 < dL
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-50
Inferences About the Slope:
t Test Example
b1 Sb1
H0: β1 = 0 From Excel output:
Coefficients Standard Error t Stat P-value
H1: β1 ≠ 0
Intercept 98.24833 58.03348 1.69296 0.12892
Square Feet 0.10977 0.03297 3.32938 0.01039
b1 − β1 0.10977 − 0
t= = t = 3.32938
Sb1 0.03297
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-51
Inferences About the Slope:
t Test Example
Test Statistic: t = 3.329 H0: β1 = 0
H1: β1 ≠ 0
d.f. = 10- 2 = 8
α /2=.025 α /2=.025
Decision: Reject H0
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-52
Inferences About the Slope:
t Test Example
From Excel output: P-Value
Coefficients Standard Error t Stat P-value
Intercept 98.24833 58.03348 1.69296 0.12892
Square Feet 0.10977 0.03297 3.32938 0.01039
H0: β1 = 0
H1: β1 ≠ 0
Decision: Reject H0, since p-value < α
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-53
F-Test for Significance
F Test statistic:
MSR
F=
MSE
where
SSR
MSR =
k
SSE
MSE =
n − k −1
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-55
F-Test for Significance
H 0 : β1 = 0 Test Statistic:
H 1 : β1 ≠ 0 MSR
F= = 11.08
α = .05 MSE
df1= 1 df2 = 8
Decision:
Critical Value: Reject H0 at α =
0.05
Fα = 5.32
α =. Conclusion:
05 There is sufficient evidence that
0 Do not Reject H0
F house size affects selling price
reject H0 F.05 = 5.32
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-56
Confidence Interval Estimate
for the Slope
Confidence Interval Estimate of the Slope:
b1 ± t n−2Sb1 d.f. = n - 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-57
Confidence Interval Estimate
for the Slope
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
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-58
t Test for a Correlation Coefficient
Hypotheses
H0: ρ = 0 (no correlation between X and Y)
H1: ρ ≠ 0 (correlation exists)
Test statistic
r - ρ of freedom)
(with n – 2 degrees
t=
1− r 2 where
r = + r 2 if b1 > 0
n−2
r = − r 2 if b1 < 0
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-59
t Test for a Correlation Coefficient
r −ρ .762 − 0
t= = = 3.329
1− r2 1 − .762 2
n−2 10 − 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-60
t Test for a Correlation Coefficient
d.f. = 10- 2 = 8
Decision:
Reject H0
α /2=.025 α /2=.025
Conclusion:
There is evidence
Reject H0 Do not reject H0 Reject H0
of a linear
-tα/2 0
tα/2 association at the
-2.3060 2.3060 5% level of
3.329
significance
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-61
Estimating Mean Values and
Predicting Individual Values
Goal: Form intervals around Y to express
uncertainty about the value of Y for a given Xi
Confidence
Interval for
the mean of Y ∧
Y
Y, given Xi
∧
Y = b0+b1Xi
Ŷ ± t n−2S YX hi
Size of interval varies according to
distance away from mean, X
1 (X i − X) 2 1 (X i − X) 2
hi = + = +
n SSX n ∑ (X i − X) 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-63
Prediction Interval for
an Individual Y, Given X
Prediction interval estimate for an individual value
of Y given a particular Xi
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-64
Estimation of Mean Values:
Example
Confidence Interval Estimate for μY|X=X
i
Find the 95% confidence interval for the mean price of 2,000
square-foot houses
∧
Predicted Price Yi = 317.85 ($1,000s)
1 (Xi − X)2
Ŷ ± t n-2S YX + = 317.85 ± 37.12
n ∑ (Xi − X) 2
1 (Xi − X)2
Ŷ ± t n-1S YX 1+ + = 317.85 ± 102.28
n ∑ (Xi − X) 2
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-67
Strategies for Avoiding
the Pitfalls of Regression
Start with a scatter plot of X on Y to observe
possible relationship
Perform residual analysis to check the
assumptions
Plot the residuals vs. X to check for violations
of assumptions such as equal variance
Use a histogram, stem-and-leaf display, box-
and-whisker plot, or normal probability plot of
the residuals to uncover possible non-normality
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-68
Strategies for Avoiding
the Pitfalls of Regression
If there is violation of any assumption, use
alternative methods or models
If there is no evidence of assumption
violation, then test for the significance of the
regression coefficients and construct
confidence intervals and prediction intervals
Avoid making predictions or forecasts
outside the relevant range
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-69
Chapter Summary
In this chapter, we have
Introduced types of regression models
Reviewed assumptions of regression and
correlation
Discussed determining the simple linear
regression equation
Described measures of variation
Discussed residual analysis
Addressed measuring autocorrelation
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-70
Chapter Summary
In this chapter, we have
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 13-71