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# Linear regression

Linear relations

• Yt = b0 + b1 Xt
• Where Yt is the dependent variable being forecasted
• Xt is the independent variable being used to explain Y. In
Linear Trend Lines, Xt is assumed to be t.
• b1 is the slope of the line, determined by Excel
• b0 is the y intercept of the line, determined by Excel
Coefficient of Determination: R-square

## • Proportion of variation in Y around its mean that is

accounted for by the regression model
• 0 <= R2 <= 1
• Will always increase as add more independent
variables into regression model. Use adjusted R2 to
compare when more than one independent
variable is used
Standard Error of the line: Se

## • The standard deviation of estimation errors

• The measure of amount of scatter around the
regression line
• Can be used as a rough rule of thumb for predicting
level of accuracy.
Simple Linear Regression: Example

## You want to examine Annual Store

Sales Feet
the linear dependency
of the annual sales of (\$1000)

## produce stores on their 1 1,726 3,681

size in square footage. 2 1,542 3,395
Sample data for seven 3 2,816 6,653
stores were obtained. 4 5,555 9,543
Find the equation of 5 1,292 3,318
the straight line that 6 2,208 5,563
fits the data best. 7 1,313 3,760
Scatter Diagram: Example
12000
Annua l Sa le s (\$000)

10000

8000

6000

4000

2000

0
0 1000 2000 3000 4000 5000 6000

S q u a re F e e t
Equation for the Sample
Regression Line: Example

Yˆi  b0  b1 X i
 1636.415  1.487 X i
Interpretation of Results: Example

## The slope of 0.6336 means that for each increase of

one unit in Area, we predict the average of Sales to
increase by an estimated 0.6336 units.

## The model estimates that for each increase of one

square foot in the size of the store, the expected
annual sales are predicted to increase by \$634.
Regression
• Consider the following dataset.
plot(salesData\$sales,salesData\$area)
Regression
• Fit a regression model to the data.
Model1 = lm(Sales ~ Area, data = salesData)
• Output:
Regression
• Maybe there is more…
model1 = lm(Sales ~ Area, data = salesData)
summary(model1)
• Output:
Regression
• And more…
par(mfrow=c(2,2))
plot(model1)
Regression
• What all is there?
names(model1)
• Output
Regression
• What all is there?
• names(summary(model1))
• Output

## • And even more…

Regression
• Fit confidence intervals to line.
predict.lm(cherry.lm,
interval="confidence")

generated.