Amity Business School

Simple Linear Regression

 Simple Linear Regression Model
 Least Squares Method
 Coefficient of Determination
 Model Assumptions
 Testing for Significance
 Using the Estimated Regression Equation
for Estimation and Prediction
 Computer Solution
 Residual Analysis: Validating Model Assumptions

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Introduction
• Sir Francis Galton F.R.S 1822 - 1911

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Introduction
• Regression Analysis is used to predict
the value of one variable on the basis of
other variable.
• The variable being predicted, is called the
dependent variable.
• The variable or variables being used to
predict the value of dependent variable are
called Independent Variable.

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Illustration
• The product manager in charge of ABC brand of
children's breakfast cereal would like to predict the
demand for cereal during the next year. To use
regression analysis he and his staff list the following
variables as likely to affect his sales:
1. Price of the product, 2.No of Children 5 to 12 years of
age, 3. Price of competitors products, 4.Effectiveness of
Advertising, 5.Annual sales this year, 6.Annual sales in
the previous year

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Simple Linear Regression

Model
 The equation that describes how y is related to x and
an error term is called the regression model.
 The simple linear regression model is:

y = b0 + b1 x + e

where:
b0 and b1 are called parameters of the model,
e is a random variable called the error term.

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Simple Linear Regression Equation

 The simple linear regression equation is:

E(y) = b0 + b1x

• Graph of the regression equation is a straight line.

• b0 is the y intercept of the regression line.
• b1 is the slope of the regression line.
• E(y) is the expected value of y for a given x value.

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 Positive Linear Relationship

E(y)
Regression line

Intercept Slope b1
b0 is positive

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 Negative Linear Relationship

E(y)

Intercept Regression line

b0

Slope b1
is negative

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 No Relationship

E(y)

Regression line
Intercept
b0
Slope b1
is 0

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Estimated Simple Linear Regression Equation

 The estimated simple linear regression equation

ŷ  b0  b1 x

• The graph is called the estimated regression line.

• b0 is the y intercept of the line.
• b1 is the slope of the line.
• ŷ is the estimated value of y for a given x value.

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Estimation Process
Regression Model Sample Data:
y = b0 + b1 x + e x y
Regression Equation x1 y 1
E(y) = b0 + b1x . .
Unknown Parameters . .
b0 , b1 xn y n

Estimated
b0 and b1 Regression Equation
provide estimates of ŷ  b0  b1 x
b0 and b1 Sample Statistics
b0 , b1

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