Regression analysis in

Excel - the basics

In statistical modeling, regression analysis is used
to estimate the relationships between two or more
variables:
Dependent variable (aka criterion variable) is the
main factor you are trying to understand and
predict.
Independent
variables (aka explanatory variables, or predictors)
are the factors that might influence the dependent
variable.
Regression analysis helps you understand how the
dependent variable changes when one of the
independent variables varies and allows to
mathematically determine which of those variables
really has an impact.
Technically, a regression analysis model is based on
the sum of squares, which is a mathematical way
to find the dispersion of data points. The goal of a
model is to get the smallest possible sum of squares
and draw a line that comes closest to the data.
In statistics, they differentiate between a simple and
multiple linear regression. Simple linear
regression models the relationship between a
dependent variable and one independent variables
using a linear function. If you use two or more
explanatory variables to predict the dependent
variable, you deal with multiple linear
regression. If the dependent variable is modeled
as a non-linear function because the data
relationships do not follow a straight line,
use nonlinear regression instead. The focus of
this tutorial will be on a simple linear regression.
As an example, let's take sales numbers for
umbrellas for the last 24 months and find out the
average monthly rainfall for the same period. Plot
this information on a chart, and the regression line
will demonstrate the relationship between the
independent variable (rainfall) and dependent
variable (umbrella sales):

Linear regression equation

Mathematically, a linear regression is defined by this
equation:
y = bx + a + ε

Where:
  x is an independent variable.
 y is a dependent variable.
 a is the Y-intercept, which is the expected mean
value of y when all x variables are equal to 0.
On a regression graph, it's the point where the
line crosses the Y axis.
 b is the slope of a regression line, which is the
rate of change for y as x changes.
 ε is the random error term, which is the
difference between the actual value of a
dependent variable and its predicted value.
The linear regression equation always has an error
term because, in real life, predictors are never
perfectly precise. However, some programs,
including Excel, do the error term calculation behind
the scenes. So, in Excel, you do linear regression
using the least squares method and seek
coefficients a and b such that:
y = bx + a

For our example, the linear regression equation

takes the following shape:
Umbrellas sold = b * rainfall + a

There exist a handful of different ways to

find a and b. The three main methods to perform
linear regression analysis in Excel are:
 Regression tool included with Analysis ToolPak
 Scatter chart with a trendline
 Linear regression formula
Below you will find the detailed instructions on using
each method.
How to do linear regression
in Excel with Analysis
ToolPak
This example shows how to run regression in Excel
by using a special tool included with the Analysis
ToolPak add-in.

Enable the Analysis ToolPak add-

in
Analysis ToolPak is available in all versions of Excel
2019 to 2003 but is not enabled by default. So, you
need to turn it on manually. Here's how:
1. In your Excel, click File > Options.
2. In the Excel Options dialog box, select Add-
ins on the left sidebar, make sure Excel Add-
ins is selected in the Manage box, and
click Go.
 3. In the Add-ins dialog box, tick off Analysis
Toolpak, and click OK:

This will add the Data Analysis tools to

the Data tab of your Excel ribbon.

Run regression analysis

In this example, we are going to do a simple linear
regression in Excel. What we have is a list of
average monthly rainfall for the last 24 months in
column B, which is our independent variable
(predictor), and the number of umbrellas sold in
column C, which is the dependent variable. Of
course, there are many other factors that can affect
sales, but for now we focus only on these two
variables:

With Analysis Toolpak added enabled, carry out

these steps to perform regression analysis in Excel:
1. On the Data tab, in the Analysis group, click
the Data Analysis button.

2. Select Regression and click OK.

3. In the Regression dialog box, configure the

following settings:
o Select the Input Y Range, which is
your dependent variable. In our case,
it's umbrella sales (C1:C25).
 o Select the Input X Range, i.e.
your independent variable. In this
example, it's the average monthly rainfall
(B1:B25).
If you are building a multiple regression
model, select two or more adjacent columns
with different independent variables.
o Check the Labels box if there are
headers at the top of your X and Y
ranges.
o Choose your preferred Output option, a
new worksheet in our case.
o Optionally, select
the Residuals checkbox to get the
difference between the predicted and
 actual values.

4. Click OK and observe the regression analysis

output created by Excel.

Interpret regression analysis

output
As you have just seen, running regression in Excel is
easy because all calculations are preformed
automatically. The interpretation of the results is a
bit trickier because you need to know what is behind
each number. Below you will find a breakdown of 4
major parts of the regression analysis output.
Regression analysis output: Summary
Output
This part tells you how well the calculated linear
regression equation fits your source data.

Here's what each piece of information means:

Multiple R. It is the Correlation Coefficient that
measures the strength of a linear relationship
between two variables. The correlation coefficient
can be any value between -1 and 1, and its absolute
value indicates the relationship strength. The larger
the absolute value, the stronger the relationship:
 1 means a strong positive relationship
 -1 means a strong negative relationship
 0 means no relationship at all
R Square. It is the Coefficient of Determination,
which is used as an indicator of the goodness of fit.
It shows how many points fall on the regression line.
The R2 value is calculated from the total sum of
squares, more precisely, it is the sum of the squared
deviations of the original data from the mean.
In our example, R2 is 0.91 (rounded to 2 digits),
which is fairy good. It means that 91% of our values
fit the regression analysis model. In other words,
91% of the dependent variables (y-values) are
explained by the independent variables (x-values).
Generally, R Squared of 95% or more is considered
a good fit.
Adjusted R Square. It is the R square adjusted for
the number of independent variable in the model.
You will want to use this value instead of R
square for multiple regression analysis.
Standard Error. It is another goodness-of-fit
measure that shows the precision of your regression
analysis - the smaller the number, the more certain
you can be about your regression equation. While
R2 represents the percentage of the dependent
variables variance that is explained by the model,
Standard Error is an absolute measure that shows
the average distance that the data points fall from
the regression line.
Observations. It is simply the number of
observations in your model.

Regression analysis output: ANOVA

The second part of the output is Analysis of Variance
(ANOVA):

Basically, it splits the sum of squares into individual

components that give information about the levels
of variability within your regression model:
  df is the number of the degrees of freedom
associated with the sources of variance.
 SS is the sum of squares. The smaller the
Residual SS compared with the Total SS, the
better your model fits the data.
 MS is the mean square.
 F is the F statistic, or F-test for the null
hypothesis. It is used to test the overall
significance of the model.
 Significance F is the P-value of F.
The ANOVA part is rarely used for a simple linear
regression analysis in Excel, but you should
definitely have a close look at the last component.
The Significance F value gives an idea of how
reliable (statistically significant) your results are. If
Significance F is less than 0.05 (5%), your model is
OK. If it is greater than 0.05, you'd probably better
choose another independent variable.

Regression analysis output: coefficients

This section provides specific information about the
components of your analysis:

The most useful component in this section

is Coefficients. It enables you to build a linear
regression equation in Excel:
y = bx + a

For our data set, where y is the number of umbrellas

sold and x is an average monthly rainfall, our linear
regression formula goes as follows:
Y = Rainfall Coefficient * x + Intercept

Equipped with a and b values rounded to three

decimal places, it turns into:
Y=0.45*x-19.074

For example, with the average monthly rainfall

equal to 82 mm, the umbrella sales would be
approximately 17.8:
0.45*82-19.074=17.8

In a similar manner, you can find out how many

umbrellas are going to be sold with any other
monthly rainfall (x variable) you specify.

Regression analysis output: residuals

If you compare the estimated and actual number of
sold umbrellas corresponding to the monthly rainfall
of 82 mm, you will see that these numbers are
slightly different:
 Estimated: 17.8 (calculated above)
 Actual: 15 (row 2 of the source data)
Why's the difference? Because independent
variables are never perfect predictors of the
dependent variables. And the residuals can help you
understand how far away the actual values are from
the predicted values:

For the first data point (rainfall of 82 mm), the

residual is approximately -2.8. So, we add this
number to the predicted value, and get the actual
value: 17.8 - 2.8 = 15.

How to make a linear

regression graph in Excel
If you need to quickly visualize the relationship
between the two variables, draw a linear regression
chart. That's very easy! Here's how:
1. Select the two columns with your data,
including headers.
2. On the Inset tab, in the Chats group, click
the Scatter chart icon, and select
 the Scatter thumbnail (the first one):

This will insert a scatter plot in your

worksheet, which will resemble this one:

3. Now, we need to draw the least squares

regression line. To have it done, right click on
any point and choose Add Trendline… from
 the context menu.

4. On the right pane, select the Linear trendline

shape and, optionally, check Display
Equation on Chart to get your regression
 formula:

As you may notice, the regression equation

Excel has created for us is the same as the
linear regression formula we built based on
the Coefficients output.
5. Switch to the Fill & Line tab and customize the
line to your liking. For example, you can
choose a different line color and use a solid
line instead of a dashed line (select Solid line
in the Dash type box):
At this point, your chart already looks like a decent
regression graph:

Still, you may want to make a few more

improvements:
 Drag the equation wherever you see fit.
 Add axes titles (Chart Elements button > Axis
Titles).
 If your data points start in the middle of the
horizontal and/or vertical axis like in this
example, you may want to get rid of the
excessive white space. The following tip
explains how to do this: Scale the chart axes to
reduce white space.
 And this is how our improved regression graph
looks like:

Important note! In the regression graph, the

independent variable should always be on the X
axis and the dependent variable on the Y axis. If
your graph is plotted in the reverse order, swap
the columns in your worksheet, and then draw
the chart anew. If you are not allowed to
rearrange the source data, then you can switch
the X and Y axes directly in a chart.

How to do regression in
Excel using formulas
Microsoft Excel has a few statistical functions that
can help you to do linear regression analysis such as
LINEST, SLOPE, INTERCEPT, and CORREL.
The LINEST function uses the least squares
regression method to calculate a straight line that
best explains the relationship between your
variables and returns an array describing that line.
You can find the detailed explanation of the
function's syntax in this tutorial. For now, let's just
make a formula for our sample dataset:
=LINEST(C2:C25, B2:B25)

Because the LINEST function returns an array of

values, you must enter it as an array formula. Select
two adjacent cells in the same row, E2:F2 in our
case, type the formula, and press Ctrl + Shift +
Enter to complete it.
The formula returns the b coefficient (E1) and
the a constant (F1) for the already familiar linear
regression equation:
y = bx + a

If you avoid using array formulas in your

worksheets, you can calculate a and b individually
with regular formulas:
Get the Y-intercept (a):
=INTERCEPT(C2:C25, B2:B25)

Get the slope (b):

=SLOPE(C2:C25, B2:B25)
Additionally, you can find the correlation
coefficient (Multiple R in the regression
analysis summary output) that indicates how
strongly the two variables are related to each other:
=CORREL(B2:B25,C2:C25)

The following screenshot shows all these Excel

regression formulas in action:

Tip. If you'd like to get additional statistics for your

regression analysis, use the LINEST function with
the stats parameter set to TRUE as shown in this
example.
That's how you do linear regression in Excel. That
said, please keep in mind that Microsoft Excel is not
a statistical program. If you need to perform
regression analysis at the professional level, you
may want to use targeted software such
as XLSTAT, RegressIt, etc.