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Chap 13-1
Chapter Goals
After completing this chapter, you should be
able to:
Chap 13-2
Chapter Goals
(continued)
Chap 13-3
Chap 13-4
Curvilinear relationships
y
x
y
x
y
x
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
x
Chap 13-5
Weak relationships
y
x
y
x
y
x
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
x
Chap 13-6
x
y
x
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-7
Correlation Coefficient
(continued)
Chap 13-8
Features of and r
Unit free
Range between -1 and 1
The closer to -1, the stronger the negative
linear relationship
The closer to 1, the stronger the positive
linear relationship
The closer to 0, the weaker the linear
relationship
Chap 13-9
Examples of Approximate
r Values
y
r = -1
r = -.6
r=0
r = +.3
r = +1
x
Chap 13-10
Calculating the
Correlation Coefficient
Sample correlation coefficient:
( x x )( y y )
[ ( x x ) ][ ( y y ) ]
2
n xy x y
[n( x 2 ) ( x )2 ][n( y 2 ) ( y )2 ]
where:
r = Sample correlation coefficient
n = Sample size
x = Value of the independent variable
y = Value of the dependent variable
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-11
Calculation Example
Tree
Height
Trunk
Diameter
xy
y2
x2
35
280
1225
64
49
441
2401
81
27
189
729
49
33
198
1089
36
60
13
780
3600
169
21
147
441
49
45
11
495
2025
121
51
12
612
2601
144
=321
=73
=3142
=14111
=713
Chap 13-12
Calculation Example
(continued)
Tree
Height,
y
n xy x y
0.886
Trunk Diameter, x
Chap 13-13
Excel Output
Excel Correlation Output
Tools / data analysis / correlation
Correlation between
Tree Height and Trunk Diameter
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-14
Hypotheses
H0: = 0
(no correlation)
HA: 0
(correlation exists)
Test statistic
1 r
n2
2
Chap 13-15
(No correlation)
H1: 0
(correlation exists)
=.05 , df = 8 - 2 = 6
r
1 r 2
n2
.886
1 .886 2
82
4.68
Chap 13-16
r
1 r 2
n2
.886
1 .886 2
82
Decision:
Reject H0
4.68
Conclusion:
There is
evidence of a
linear relationship
at the 5% level of
significance
d.f. = 8-2 = 6
/2=.025
Reject H0
-t/2
-2.4469
/2=.025
Do not reject H0
Reject H0
t/2
2.4469
4.68
Chap 13-17
Introduction to Regression
Analysis
Chap 13-18
Chap 13-19
No Relationship
Chap 13-20
Population
Slope
Coefficient
Independent
Variable
y 0 1x
Linear component
Random
Error
term, or
residual
Random Error
component
Chap 13-21
Linear Regression
Assumptions
Chap 13-22
y 0 1x
(continued)
Observed Value
of y for xi
Predicted Value
of y for xi
Slope = 1
Random Error
for this x value
Intercept = 0
xi
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
x
Chap 13-23
Estimate of
the regression
Estimate of the
regression slope
intercept
y i b0 b1x
Independent
variable
Chap 13-24
e (y y)
2
(y (b
b1x))
Chap 13-25
b1
( x x )( y y )
(x x)
2
algebraic equivalent:
b1
x y
xy
n
2
(
x
)
2
x
and
b0 y b1 x
Chap 13-26
Interpretation of the
Slope and the Intercept
Chap 13-27
Chap 13-28
Chap 13-29
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Chap 13-30
Chap 13-31
Excel Output
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
41.33032
Observations
ANOVA
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-32
Graphical Presentation
Intercept
= 98.248
Chap 13-33
Interpretation of the
Intercept, b0
house price 98.24833 0.10977 (square feet)
Chap 13-34
Interpretation of the
Slope Coefficient, b1
house price 98.24833 0.10977 (square feet)
Chap 13-35
Chap 13-36
SST
Total sum of
Squares
SST ( y y )2
SSE
Sum of Squares
Error
SSE ( y y )2
SSR
Sum of Squares
Regression
SSR ( y y )2
where:
Chap 13-37
Chap 13-38
y
yi
2
SSE = (yi - yi )
_
y
Xi
_
y
x
Chap 13-39
Coefficient of
Determination, R2
SSR
R
SST
2
where
0 R 1
2
Chap 13-40
Coefficient of
Determination, R2
(continued)
Coefficient of determination
SSR sum of squares explained by regression
R
SST
total sum of squares
2
R r
2
where:
R2 = Coefficient of determination
r = Simple correlation coefficient
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-41
Examples of Approximate
R2 Values
y
R2 = 1
R2 = 1
R = +1
2
Chap 13-42
Examples of Approximate
R2 Values
y
0 < R2 < 1
x
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-43
Examples of Approximate
R2 Values
R2 = 0
No linear relationship
between x and y:
R2 = 0
Chap 13-44
Excel Output
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
41.33032
Observations
ANOVA
SSR 18934.9348
R
0.58082
SST 32600.5000
2
Regression Statistics
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-45
SSE
s
n k 1
Where
SSE = Sum of squares error
n = Sample size
k = number of independent variables in the
model
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
Chap 13-46
sb1
(x x)
( x)
x n
where:
SSE
s
= Sample standard error of the estimate
n2
Chap 13-47
Excel Output
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
sb1 0.03297
41.33032
Observations
ANOVA
s 41.33032
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-48
small s
small sb1
large sb1
large s
Chap 13-49
Test statistic
b1 1
t
sb1
d.f. n 2
where:
b1 = Sample regression slope
coefficient
1 = Hypothesized slope
sb1 = Estimator of the standard
error of the slope
Chap 13-50
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Chap 13-51
HA: 1 0
Coefficients
Intercept
Square Feet
d.f. = 10-2 = 8
/2=.025
Reject H0
/2=.025
Do not reject H0
-t/2
-2.3060
Reject H
0
t/2
2.3060 3.329
b1
Standard Error
sb1
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
0.10977
0.03297
3.32938
0.01039
Decision:
Reject H0
Conclusion:
There is sufficient evidence
that square footage affects
house price
Chap 13-52
b1 t /2 sb1
d.f. = n - 2
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-53
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-54
1 (x p x)
2
n (x x)
2
y t /2 s
Chap 13-55
1 (x p x)
1
2
n (x x)
2
y t /2 s
Chap 13-56
Interval Estimates
for Different Values of x
y
Prediction Interval
for an individual y,
given xp
Confidence
Interval for
the mean of
y, given xp
b
1
+
y = b0
xp
x
Chap 13-57
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Chap 13-58
Chap 13-59
y t /2 s
(x p x)2
317.85 37.12
2
n (x x)
Chap 13-60
Estimation of Individual
Values: Example
Prediction Interval Estimate for
y|xp
y t /2s
(x p x)2
1
1
317.85 102.28
2
n (x x)
Chap 13-61
In Excel, use
PHStat | regression | simple linear regression
Check the
confidence and prediction interval for X=
box and enter the x-value and confidence level
desired
Chap 13-62
Input values
Chap 13-63
Residual Analysis
Purposes
Examine for linearity assumption
Examine for constant variance for all
levels of x
Evaluate normal distribution assumption
Chap 13-64
Not Linear
Business Statistics: A Decision-Making Approach, 6e 2005 PrenticeHall, Inc.
residuals
residuals
Linear
Chap 13-65
x
Non-constant variance
residuals
residuals
Constant variance
Chap 13-66
Excel Output
RESIDUAL OUTPUT
Predicted
House Price
Residuals
251.92316
-6.923162
273.87671
38.12329
284.85348
-5.853484
304.06284
3.937162
218.99284
-19.99284
268.38832
-49.38832
356.20251
48.79749
367.17929
-43.17929
254.6674
64.33264
10
284.85348
-29.85348
Chap 13-67
Chapter Summary
Chap 13-68
Chapter Summary
(continued)
Chap 13-69