Assignment Questions

Quantitative Methods
The following table gives data of advertising expenses and sales of a company for various months of the
year 2018.

Advertising Expense Sales

(Rs. ‘000) (Rs. ‘000)
50 1200
60 1500
70 1600
90 2000
120 2200
170 2500
140 2500
160 2600
170 2800
170 2900
200 3100
250 3900

Questions:

1. Plot scatter diagram and visualize if there is any evidence of linear relationship between variables
(advertising expenses and sales). Interpret the direction and magnitude of relationship.
2. Calculate the value of covariance and interpret it.
3. Calculate Karl Pearson’s Coefficient of Correlation and interpret its value
4. Calculate Spearman’s Rank Correlation Coefficient and interpret its value
5. Construct a regression model to predict the sales volume based on advertising expense. Interpret the
model in the light of values of regression coefficients.
6. Calculate the predicted values of sales based on observed values of advertising expense.
7. Calculate the values of residuals.
8. Calculate values of total variation, explained variation and unexplained variation.
9. Calculate and interpret the value of coefficient of determination
10. Calculate model standard deviation and interpret it.

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SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.98314346
R Square 0.966571063
Adjusted R Square 0.962856737
Standard Error 132.5344738
Observations 11

ANOVA
Significance
df SS MS F F
Regression 1 4571002.428 4571002.428 260.2278271 5.98904E-08
Residual 9 158088.4808 17565.38676
Total 10 4729090.909

Coefficients Standard Error

Intercept 788.6477462 113.8912294
50 11.82804674 0.733223143

RESIDUAL
OUTPUT

Predicted
Observation 1200 Residuals
1 1498.330551 1.669449082
2 1616.611018 -16.61101836
3 1853.171953 146.8280467
4 2208.013356 -8.013355593
5 2799.415693 -299.4156928
6 2444.57429 55.42570952
7 2681.135225 -81.13522538
8 2799.415693 0.584307179
9 2799.415693 100.5843072
10 3154.257095 -54.25709516
11 3745.659432 154.3405676

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Interpret the key results for Covariance
Learn more about Minitab

You can use the covariance to determine the direction of a linear relationship between two variables as follows:

 If both variables tend to increase or decrease together, the coefficient is positive.

 If one variable tends to increase as the other decreases, the coefficient is negative.

Covariance is similar to correlation but when the covariance is calculated, the data are not standardized.
Therefore, the covariance is expressed in units that vary with the data and is not converted to a
standardized scale of −1 to +1. Because the data are not standardized, you cannot use the covariance
statistic to assess the strength of a linear relationship. To assess the strength of a relationship between two
variables using a standardized scale of -1 to +1, use Correlation.

Interpretation of Correlation
Correlation refers to a technique used to measure the relationship between two or
more variables.When two things are correlated, it means that they vary together.Positive correlation
means that high scores on one are associated with high scores on the other, and that low scores on one
are associated with low scores on the other. Negative correlation, on the other hand, means that high
scores on the first thing are associated with low scores on the second. Negative correlation also means
that low scores on the first are associated with high scores on the second. An example is the
correlation between body weight and the time spent on a weight-loss program. If the program is
effective, the higher the amount of time spent on the program, the lower the body weight. Also, the
lower the amount of time spent on the program, the higher the body weight.
Pearson r is a statistic that is commonly used to calculate bivariate correlations.
For an Example Pearson r = -0.80, p < .01. What does this mean?
To interpret correlations, four pieces of information are necessary.
1. The numerical value of the correlation coefficient.Correlation coefficients can vary numerically
between 0.0 and 1.0. The closer the correlation is to 1.0, the stronger the relationship between the two
variables. A correlation of 0.0 indicates the absence of a relationship. If the correlation coefficient is –
0.80, which indicates the presence of a strong relationship.
2. The sign of the correlation coefficient.A positive correlation coefficient means that as variable 1
increases, variable 2 increases, and conversely, as variable 1 decreases, variable 2 decreases. In other
words, the variables move in the same direction when there is a positive correlation. A negative
correlation means that as variable 1 increases, variable 2 decreases and vice versa. In other words, the
variables move in opposite directions when there is a negative correlation. The negative sign indicates that
as class size increases, mean reading scores decrease.
3. The statistical significance of the correlation.A statistically significant correlation is indicated by a
probability value of less than 0.05. This means that the probability of obtaining such a correlation
coefficient by chance is less than five times out of 100, so the result indicates the presence of a
relationship. For -0.80 there is a statistically significant negative relationship between class size and
reading score (p < .001), such that the probability of this correlation occurring by chance is less than one
time out of 1000.
4. The effect size of the correlation.For correlations, the effect size is called the coefficient of
determination and is defined as r2. The coefficient of determination can vary from 0 to 1.00 and indicates
that the proportion of variation in the scores can be predicted from the relationship between the two
variables. For r = -0.80 the coefficient of determination is 0.65, which means that 65% of the variation in

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mean reading scores among the different classes can be predicted from the relationship between class size
and reading scores. (Conversely, 35% of the variation in mean reading scores cannot be explained.)
A correlation can only indicate the presence or absence of a relationship, not the nature of the
relationship. Correlation is not causation. There is always the possibility that a third variable influenced
the results. For example, perhaps the students in the small classes were higher in verbal ability than the
students in the large classes or were from higher income families or had higher quality teachers.

9.5 Interpreting regression coefficients

It is very important that you learn to correctly and completely interpret the co-efficient estimates.
FromE(Y|x) =β0+β1x we can see that b0 represents our estimate of the mean outcome when x= 0. Before
making an interpretation of b0, first check the range of x values covered by the experimental data. If
there is no x data near zero, then the intercept is still needed for calculating ˆy and residual values, but it
should not be interpreted because it is an extrapolated value.
If there are x values near zero, then to interpret the intercept you must express it in terms of the actual
meanings of the outcome and explanatory variables. For the example of this chapter, we would say that b0
(94.8) is the estimated corn plant weight (in grams) when no nitrogen is added to the pots (which is the
meaning of x= 0). This point estimate is of limited value, because it does not express the degree of
uncertainty associated with it. So often it is better to use the CI for b0.In this case we say that we are 95%
confident that the mean weight for corn plants with no added nitrogen is between 47 and 122 gm, which is
quite a wide range. (It would be quite misleading to report the mean no-nitrogen plant weight as
94.821gm because it gives a false impression of high precision.)After interpreting the estimate of b0 and
it’s CI, you should consider whether the null hypothesis, β0= 0 makes scientific sense. For the corn
example, the null hypothesis is that the mean plant weight equals zero when no nitrogen is added.
Because it is unreasonable for plants to weigh nothing, we should stop here and not interpret the p-value
for the intercept. For another example, consider a regression of weight gain in rats over a 6 week period as
it relates to dose of an anabolic steroid. Because we might be unsure whether the rats were initially at a
stable weight, it might make sense to test H0:β0= 0. If the null hypothesis is rejected then we conclude
that it is not true that the weight gain is zero when the dose is zero (control group), so the initial weight
was not a stable baseline weight.
Interpret the estimate, b0, only if there are data near zero and setting the explanatory variable to
zero makes scientific sense. The meaning of b0 is the estimate of the mean outcome when x= 0, and
should always be stated in terms of the actual variables of the study. The p-value for the intercept
should be interpreted (with respect to retaining or rejectingH0:β0= 0) only if both the equality and
the inequality of the mean outcome to zero when the explanatory variable is zero are scientifically
plausible.
For interpretation of a slope coefficient, this section will assume that the setting is a randomized
experiment, and conclusions will be expressed in terms of causation. Be sure to substitute association if
you are looking at an observational study. The general meaning of a slope coefficient is the change in Y
caused by a one-unit increase in x. It is very important to know in what units x are measured, so that the
meaning of a one-unit increase can be clearly expressed. For the corn experiment, the slope is the change
in mean corn plant weight (in grams) caused by a one mg increase in nitrogen added per pot. If a one-unit
change is not substantively meaningful, the effect of a larger change should be used in the interpretation.
For the corn example we could say the a 10 mg increase in nitrogen added causes a 52.7 gram increase in
plant weight on average. We can also interpret the CI for β1in the corn experiment by saying that we are
95% confident that the change in mean plant weight caused by a 10 mg increase in nitrogen is 46.8 to 58.9
gm. Be sure to pay attention to the sign of b1. If it is positive then b1 represents the increase in outcome

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caused by each one-unit increase in the explanatory variable. If b1is negative, then each one-unit increase
in the explanatory variable is associated with a fallin outcome of magnitude equal to the absolute value of
b1.A significant p-value indicates that we should reject the null hypothesis that β1= 0. We can express
this as evidence that plant weight is affected by changes in nitrogen added. If the null hypothesis is
retained, we should express this shaving no good evidence that nitrogen added affects plant weight.
Particularly in the case of when we retain the null hypothesis, the interpretation of the CI for β1 is better
than simply relying on the general meaning of retain.

The interpretation of b1 is the change (increase or decrease depending on

the sign) in the average outcome when the explanatory variable increases
by one unit. This should always be stated in terms of the actual variables
of the study. Retention of the null hypothesis H0 : β1=0indicates no
evidence that a change in x is associated with (or causes for a
randomized experiment) a change in y. Rejection indicates that changes
in x cause changes in y(assuming a randomized experiment).