Regression Analysis

Introduction to Regression Analysis

Regression analysis is used to:
Predict the value of a dependent variable based on the value of at least one independent variable Explain the impact of changes in an independent variable on the dependent variable

Dependent variable: the variable we wish to explain Independent variable: the variable used to explain the dependent variable

Simple Linear Regression Model

Only one independent variable, x
Relationship between x and y is described by a linear function Changes in y are assumed to be caused by changes in x

Types of Regression Models

Positive Linear Relationship Relationship NOT Linear

Negative Linear Relationship

No Relationship

Population Linear Regression

The population regression model:
Population y intercept Population Slope Coefficient Independen t Variable

Dependent Variable

y 0 1x
Linear component

Random Error term, or residual

Random Error component

Population Linear Regression

y
Observed Value of y for xi

y 0 1x
i

(continued)

Slope = 1

Predicted Value of y for xi

Intercept = 0

Random Error for this x value

xi

EXAMPLE:

Ad Expenditures (x)

4.5

5.5

Profit (y)
(Profit)

10

11

* *

*
* *

goal: find the line which best fits the data; that is, find the line which best represents the average relationship between x & y in this data sample.

x
(Ad expenditures)

Ad Expenditures (x)

4.5

5.5

Profit (y)
(Profit)

10

11

y The actual line can be written as y = a + bx where a is the intercept of the line & b is its slope. One possible set of values for a and b gives y = 0.65 + 1.58x. x
(Ad expenditures)

* *

*
* *

Ad Expenditures (x)

4.5

5.5

Profit (y)
(Profit)

10

11

y The actual line can be written as y = a + bx where a is the intercept of the line & b is its slope. One possible set of values for a and b gives

* *

*
*

Intercept (0.65)

y = 0.65 + 1.58x.
x
(Ad expenditures)

Ad Expenditures (x)

4.5

5.5

Profit (y)
(Profit)

10

11

Slope
(1.58) *
*
* *

The actual line can be written as y = a + bx where a is the intercept of the line & b is its slope. One possible set of values for a and b gives

Intercept (0.65)

y = 0.65 + 1.58 x.
x
(Ad expenditures)

Sales forecasting using REGRESSION ANALYSIS

Pippy Tubes is a leading exporter of CRTs for the overseas markets. Annual exports in 000units for 6 years spent in the market has been tabulated below, looking at the data predict the expected forecast for 7th year.
YEAR (X) 1 2 3

EXPORTS (Y);in 000 units 33 32 29

4
5

26
27

24

YEAR (X) 1 2

EXPORTS (Y);in 000 units 33 32

X*Y 33 64

X*X 1 4

3
4 5

29
26 27

87
104 135

9
16 25

6
X= 21

24
Y= 171

144
XY = 567

36
x*x = 91

 According to the linear Regression model, Y = a + bX, Where Y= Exports(in units) X= No. of years, a= intercept on y axis b= slope of the regression line Taking summation both sides, Y = n*a + b X

 Putting values from the table, 171 = 6a + 21b @ Multiplying eqn. by X on both sides ,we get XY = a X + b x*x Putting values from the table, 567 = 21a+ 91b $ Solving @ and $ for a,b we get a=34.8 b=-1.8.Hence the eqn depicting sales forecast will be Y= 34.8 -1.8X Sales for 7th year ,y= 34.8 1.8*7=22200 units.

Advantages of Regression Analysis

High forecasting accuracy. Objective method Can predict the turning of the companys sales.

Disdvantages of Regression Analysis

Technically complex Expensive & time consuming. Use of computer & s/w packages essential if independent variables are more.