Coefficient of Determination

Class Exercise example: Price of a Car

Q1. A student of statistics has decided to buy a small car. Looking
at the cars for sale in the local newspaper she finds six cars of
the model she wants to buy advertised for sale. The prices and
ages of these cars are shown in Table below.

Y = Price of the car

X = Age of the car
 Regression output

Ŷi  b0  b1Xi

b0 = intercept = 16.6
b1 = slope = -1.1
Regression output

Ŷi  b0  b1Xi
Actual Value and Estimated Value
Y= Actual value of
Y5 = Actual value of a 5 year old car = $12,100
Actual Value and Estimated Value
Y= Actual value of Yintercept = 16.6
Y5 = Actual value of a 5 year old car = $12,100
 Measures of Variation
Total variation is made up of two parts.

SST  SSR  SSE

Total Sum of Regression Sum Error Sum of
Squares of Squares Squares

SST  ( Yi  Y)2 SSR   (Yˆi  Y )2 SSE   i i

(Y  Yˆ ) 2

Measures the Explained variation Variation attributable to

variation of the Yi attributable to the factors other than the
values around their relationship relationship between X
mean Y. between X and Y. and Y.
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7 Pearson Australia Group Pty Ltd) –
9781442549272/Berenson/Business Statistics /2e
 Coefficient of Determination, R2
The coefficient of determination is the portion of the
total variation in the dependent variable that is
explained by variation in the independent variable.
The coefficient of determination is also called r-squared
and is denoted as R2 (or r2)

2 SSR regression sum of squares

r  
SST total sum of squares

Note: 0  r2  1
Copyright © 2013 Pearson Australia (a division of
8 Pearson Australia Group Pty Ltd) –
9781442549272/Berenson/Business Statistics /2e
Examples of Approximate R2 values
Y Y Perfect linear
relationship
between X and Y.
100% of the
variation in Y is
X explained by
R2 = 1 R2 = 1 X variation in X.

Y
No linear relationship between X
and Y.
The value of Y does not depend
on X (None of the variation in Y is
explained by variation in X).
R2 = 0 X
Copyright © 2013 Pearson Australia (a division of
9 Pearson Australia Group Pty Ltd) –
9781442549272/Berenson/Business Statistics /2e
Examples of Approximate R2 values
0 < R2 < 1
Y
Weaker linear relationships
between X and Y.

X
Y Some but not all of the
variation in Y is explained
by variation in X.

X
Copyright © 2013 Pearson Australia (a division of
10 Pearson Australia Group Pty Ltd) –
9781442549272/Berenson/Business Statistics /2e
 Class Exercise example: Price of a Car
Q1. A student of statistics has decided to buy a small car. Looking
at the cars for sale in the local newspaper she finds six cars of
the model she wants to buy advertised for sale. The prices and
ages of these cars are shown in Table below.

Y = Price of the car

X = Age of the car
Regression output