Advanced Mathematics for

Business
Topic 7:
Regression Analysis 1

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Regression Analysis 1 Topic 7 - 1.2

Scope and Coverage

This topic will cover:
Simple linear regression
Pearsons (product moment) correlation coefficient
Spearmans (rank order) correlation coefficient

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Regression Analysis 1 Topic 7 - 1.3

Learning Outcomes
By the end of this topic students will be able to:
Understand a straight line fit to bivariate data
Calculate and interpret Pearsons correlation
coefficient
Calculate and interpret Spearmans correlation
coefficient

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Regression Analysis 1 Topic 7 - 1.4

Motivation
The search for, and strength of, predictors
-

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What is a good predictor of future job performance?

What is this products price-demand curve?
Which process factors affect production yield?
How does a particular share price move with the
market average?

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Regression Analysis 1 Topic 7 - 1.5

savings y

The Linear Relationship

y = mx + c

income x

Assuming interval or ratio data.

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Regression Analysis 1 Topic 7 - 1.6

Least SSE Regression Criterion - 1

y

e5

e3

e4

e2
e1

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Regression Analysis 1 Topic 7 - 1.7

Least SSE Regression Criterion - 2

y

e5

e3

e4

e2
e1

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Regression Analysis 1 Topic 7 - 1.8

Least SSE Regression Criterion - 3

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Regression Analysis 1 Topic 7 - 1.9

Example - 1
A company has been carrying out experiments with
the position of a button on its website.

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Page
Position
(% vertical)

Click
Throughs
(%)

25

3.07

50

5.64

75

9.63

100

10.26

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Regression Analysis 1 Topic 7 - 1.10

Example - 2
A company has been carrying out experiments with
the position of a button on its website.
x

total

x2

25

3.07

76.75

625

50

5.64

282.00

2500

75

9.63

722.25

5625

100 10.26

1026.00

10000

2107

18750

250

28.6

mean 62.5

7.15

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xy

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Regression Analysis 1 Topic 7 - 1.11

Example - 3
A company has been carrying out experiments with
the position of a button on its website.

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Page
Position
(% vertical)

Click
Throughs
(%)

25

3.07

50

5.64

75

9.63

100

10.26

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Regression Analysis 1 Topic 7 - 1.12

Exercise - 1
A company has been carrying out experiments with
the position of a button on its website.
x

xy

x2

25

1.44

50

5.58

2500

75 14.64

5625

100
total

250

6.94

10000
18750

mean 62.5

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Regression Analysis 1 Topic 7 - 1.13

Exercise - 2
A company has been carrying out experiments with
the position of a button on its website.
x

xy

x2

25

1.44

36

50

5.58

279

2500

75 14.64

1098

5625

100

6.94

694

10000

250

28.6

2107

18750

mean 62.5

7.15

total

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Regression Analysis 1 Topic 7 - 1.14

How Well Does the Line Fit? - 1

x

25

3.07

50

5.64

75

9.63

100 10.26

25

1.44

50

5.58

75 14.64
100

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6.94

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Regression Analysis 1 Topic 7 - 1.15

How Well Does the Line Fit? - 2

unexplained
explained

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Regression Analysis 1 Topic 7 - 1.16

Pearson Correlation

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Regression Analysis 1 Topic 7 - 1.17

How Well Does the Line Fit? - 3

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xy

x2

y2

25

3.07

76.75

625

9.425

50

5.64

282.00

2500

31.810

75

9.63

722.25

5625

92.737

100

10.26

1026.00

10000 105.268

250

28.6

2107

18750 239.239

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Regression Analysis 1 Topic 7 - 1.18

How Well Does the Line Fit? - 4

x

25

3.07

50

5.64

75

9.63

100 10.26

25

1.44

50

5.58

75 14.64
100

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6.94

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Regression Analysis 1 Topic 7 - 1.19

Language of Correlation - 1
Sign
- r > 0 positive linear relationship
- r = 0 no linear relationship
- r < 0 negative linear relationship

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Regression Analysis 1 Topic 7 - 1.20

Language of Correlation - 2
Strength
- Physical sciences / engineering R2 > 0.6 often found
- Social sciences / policy R2 > 0.25 sometimes useful
- Business and management includes science & social
science!
- But you will see language like R2 > 0.8 strong, R2 > 0.5
moderate, R2 > 0.25 weak relationship
- Be careful; context and numbers often more informative
than descriptive word, but words help to communicate.

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Regression Analysis 1 Topic 7 - 1.21

What is r?
A

r=1

r = 0.9
D

r=0

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r = -0.7

r = 0.7
F

r = -0.9

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Regression Analysis 1 Topic 7 - 1.22

Interpolation and Extrapolation

Interpolation - Estimates between values already known
Extrapolation - Estimates outside known values

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Regression Analysis 1 Topic 7 - 1.23

Basics of Simple Linear Regression

Plot scatter graph to intuit whether straight line is
reasonable
Look at r2 = R2 for strength of relationship
Look at sign of r for direction
- Check agrees with graph

Look at m for gradient of relationship

Use straight line equation to interpolate (with care)
Use straight line equation to extrapolate (with caution)

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Regression Analysis 1 Topic 7 - 1.24

Spearmans Rank Correlation

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Regression Analysis 1 Topic 7 - 1.25

Spearmans Correlation Example - 1

Two interviewers individually rank prospective job
candidates. What is the Spearman correlation
coefficient?
Candidate Interviewer 1 Interviewer 2

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Hidayat

Elisa

Nouman

Bernie

Li Ren

Ahere

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Regression Analysis 1 Topic 7 - 1.26

Spearmans Correlation Example - 2

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Regression Analysis 1 Topic 7 - 1.27

Spearman Correlation - Ties?

For tied ranks use mean rank, then
Use formula for Pearson correlation
Candidate Interviewer 1 Interviewer 2

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Hidayat

OK
4

Elisa

Excellent
1

Nouman

Good
2

Bernie

OK
4

Li Ren

OK
4

Ahere

Poor
6

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Regression Analysis 1 Topic 7 - 1.28

Recap
By the end of this topic students will be able to:
Understand a straight line fit to bivariate data
Calculate and interpret Pearsons correlation
coefficient
Calculate and interpret Spearmans correlation
coefficient

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Regression Analysis 1 Topic 7 - 1.29

Bibliography
Burton, G., Carrol, G. and Wall, S. Quantitative
Methods for Business and Economics. Longman.
Buglear, J. Quantitative Methods for Business.
Elsevier Butterworth Heinemann
Hinton, PR. Statistics Explained. Routledge

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Regression Analysis 1 Topic 7 - 1.30

Topic 7 Regression Analysis 1

Any Questions?

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