Linear Regression

Confidence interval approach

Degree of freedom = n -k - 1
Hypothesis Testing T-test
T-test approach
Relation between Y and X is linear in the parameters b0 and b1 Decision rule: t > t-critical or t < - t-critical: reject Ho

X is not random P-value Smallest level of significance at which H0 can be rejected

Expected value of error term is zero

Assumptions
Variance of the error term is constant

Error term is uncorrelated across observations F-statistic

Decision rule:
Error term is normally distributed

ANOVA
Measures how well a given linear regression model
ANOVA table
Linear Regression
Standard Error of Estimate (SEE)

Percentage of the total variation in the dependent variable explained by the independent variable

Prediction Intervals

The regression sum of squares (RSS) Coefficient of Determination (R^2)

Relationships change over time

Limitations of Regression Analysis Usefulness limited for investment application since all participants can observe relationships

The sum of squared errors or residuals (SSE) Assumptions violations