Scribd
Upload
95 views5 pages

Business Stat CHAPTER 6

This document discusses correlation analysis and regression analysis. Correlation analysis measures the strength and direction of association between two variables on a scale of -1 to 1. Regression analysis constructs a mathematical model to predict one variable based on another variable. It provides estimates of dependent variables from independent variables and measures the degree of association between variables. The slope-intercept form of a regression line is ӯ = β0 + β1x, where β0 is the y-intercept, β1 is the slope, and x and y are the variables. A probabilistic regression model includes an error term to account for variation in y values.

Uploaded by

Natnael Asfaw
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
95 views5 pages

Business Stat CHAPTER 6

This document discusses correlation analysis and regression analysis. Correlation analysis measures the strength and direction of association between two variables on a scale of -1 to 1. Regression analysis constructs a mathematical model to predict one variable based on another variable. It provides estimates of dependent variables from independent variables and measures the degree of association between variables. The slope-intercept form of a regression line is ӯ = β0 + β1x, where β0 is the y-intercept, β1 is the slope, and x and y are the variables. A probabilistic regression model includes an error term to account for variation in y values.

Uploaded by

Natnael Asfaw
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

CHAPTER 6

REGRESSION AND CORRELATION ANALYSIS


Correlation Analysis
Correlation is a statistical technique to ascertain the association or relationship between two or
more variables.
Correlation is a measure of the degree of relatedness of variables. It can help a business
researcher determine, for example, whether the stocks of two airlines rise and fall in any related
manner.
correlation analysis can yield a numerical value that represents the degree of relatedness of the
variables over time.
The term r is a measure of the linear correlation of two variables. It is a number that ranges
from -1 to 0 to +1, representing the strength of the relationship between the variables. An r
value of +1 denotes a perfect positive relationship between two sets of numbers. An r value of
-1 denotes a perfect negative correlation, which indicates an inverse relationship between two
variables
The statistic r is the Pearson product-moment correlation coefficient,

•
Diagram – I Diagram – II

Diagram – III Diagram – IV

1|P ag e
Diagram – V Diagram – VI

Diagram – VII
Uses of correlations:
1. Correlation analysis helps in deriving precisely the degree and the direction of such
relationship.
2. The effect of correlation is to reduce the range of uncertainty of our prediction. The
prediction based on correlation analysis will be more reliable and near to reality.
3. Correlation analysis contributes to the understanding of economic behavior, aids in
locating the critically important variables on which others depend, may reveal to the
economist the connections by which disturbances spread and suggest to him the paths
through which stabilizing farces may become effective

2|P ag e
4. Economic theory and business studies show relationships between variables like
price and quantity demanded advertising expenditure and sales promotion measures etc.
5. The measure of coefficient of correlation is a relative measure of change.
Sl No Particulars Solution
1 Price of commodity and its demand Negative
2 Yield of crop and amount of rainfall Positive
3 No of fruits eaten and hungry of a person Negative
4 No of units produced and fixed cost per unit Negative
5 No of girls in the class and marks of boys No Correlation
6 Ages of Husbands and wife Positive
7 Temperature and sale of woollen garments Negative
8 Number of cows and milk produced Positive
9 Weight of person and intelligence No Correlation
10 Advertisement expenditure and sales volume Positive

Exercise 1:
Given the following pairs of values:
Capital Employed 1 2 3 4 5 7 8 9 11 12
Profit 3 5 4 7 9 8 10 11 12 14
(a) Draw a scatter diagram
(b) Do you think that there is any correlation between profits and capital
employed? Is it positive or negative? Is it high or low?

Regression analysis
Regression analysis is the process of constructing a mathematical model or function that can be
used to predict or determine one variable by another variable or other variables.
The most elementary regression model is called simple regression or bivariate regression involving
two variables in which one variable is predicted by another variable. In simple regression, the
variable to be predicted is called the dependent variable and is designated as y. The predictor is
called the independent variable, or explanatory variable, and is designated as x. In simple
regression analysis, only a straight-line relationship between two variables is examined.
Uses of Regression Analysis:
1. It provides estimates of values of the dependent variables from values of independent
variables.
2. It is used to obtain a measure of the error involved in using the regression line as a basis
for estimation.

3|P ag e
3. With the help of regression analysis, we can obtain a measure of degree of association or
correlation that exists between the two variables.
4. It is highly valuable tool in economies and business research, since most of the problems
of the economic analysis are based on cause-and-effect relationship.

Determining equation of regression line


In regression analysis, researchers use the slope-intercept equation of a line.
In statistics, the slope-intercept form of the equation of the regression line through the population
points is ӯ = β0 + β1 x
Where:
ӯ = the predicted value of y
β0 = the population y intercept
β1= the population slope
Deterministic models are mathematical models that produce an “exact” output for a given input.
For example, suppose the equation of a regression line is
ӯ = β0 + β1 x
A probabilistic model is one that includes an error term that allows for the y values to vary for any
given value of x.
ӯ = β0 + β1 x+ e
or y= b0+b1x
Ʃ(𝑥 − 𝑥 ) (𝑦 − 𝑦 )
β1 or 𝐛𝟏 =
Ʃ(𝑥 − 𝑥)2
Ʃ𝑦 (Ʃ𝑥)
b0 = 𝑦 − 𝑏𝑥 𝑜𝑟 +𝑏
𝑛 𝑛

Exercise 2: Sketch a scatter plot from the following data, and determine the equation of the
regression line.
Capital invested 15 8 19 15 5
Profit 47 36 56 44 21

4|P ag e
The difference between correlation and regression
Sl No Correlation Regression
1 It measures the degree and directionof It measures the nature and extent of average
relationship between the variables. relationship between two or more variables
in terms of the original units of the data

2 It is a relative measure showing It is an absolute measure of


association between the variables. relationship.
4 Correlation Coefficient is independent of Regression Coefficient is not
units of measurement. independent of units of measurement.
5 Expression of the relationship Expression of the relationship
between the variables ranges from –1 to 0 between the variables may be in any
to 1
of the forms like: Y = a + bX
Y = a + bX + cX2
6 It is not a forecasting device. It is a forecasting device which can be used
to predict the value of dependent variable
from the given value of independent
variable.
7 There may be zero correlation such as There is nothing like zero regression.
weight of wife and income of husband.

Exercise
A corporation owns several companies. The strategic planner for the corporation believes dollars
spent on advertising can to some extent be a predictor of total sales dollars. As an aid in long-term
planning, she gathers the following sales and advertising information from several of the
companies for 2009 ($ millions).
Advertising Sales
12 148 Required: a) compute β0 and β1
4 55 b)determine the equation form of ӯ = β0 + β1 x
22 338
60 994
38 541
6 89
17 126
41 379

5|P ag e

You might also like