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INTRODUCTION
REGRESSION
& household expenditure and number of
CORRELATION
1
INTRODUCTION
• Regression analysis - produces an equation
that express the dependent variable (Y) as a
function of independent variables (X).
• Correlation analysis - measures the
strength of a relationship.
• Scatter Diagram / Scatter plot - An
initial step to investigate the relationship
between the dependent and independent
variable.
Nornadiah Mohd Razali/FSKM/UiTM
X
Positive Linear Relationship
Y
X
Negative Linear Relationship
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• Regression and correlation analysis are used
to describe a relationship between dependent
variable and independent variable(s).
• Example:
(i) To describe the relationship between
children.
(ii) To predict the number of complaints
based on type of room.
(iii) To investigate the relationship between
house price and house area, number of
bedrooms, number of bathrooms and
location of the house.
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SCATTER DIAGRAM
• In a scatter diagram, the independent variable is plotted along the
horizontal X-axis and the dependent variable is plotted along the
vertical Y-axis.
• Information available in a scatter plot:
(i) Type of a relationship
(Linear / Nonlinear / No relationship)
(ii) Direction of a relationship
(Positive / Negative)
• The less scattered the points in the scatter diagram, the higher
is the degree of relationship between the dependent and
independent variables.
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Y Y
X X
Nonlinear Relationship
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CONSTRUCTING A SCATTER DIAGRAM

Y
EXAMPLE 1

A dietician wants to check the association between height

(in inches) and weight (in pounds) of a baseball player. A
sample of 9 major league baseball players is selected at
random. The data were recorded as follows:

Height 73 69 72 70 72 66 72 72 74
X Weight 201 170 180 200 190 175 205 185 186

No Relationship Construct a scatter plot for the above data. Comment on

the relationship between the heights and weights.

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CONSTRUCTING A SCATTER DIAGRAM CORRELATION ANALYSIS

EXAMPLE 2

Suppose we take a sample of seven households from a low to

moderate income neighborhood and collect information on their
• In a correlation analysis, the correlation between two
incomes and food expenditures for the past month. Construct a
variables is measured by using a linear correlation
scatter diagram for the data obtained.
coefficient, r.
Income ($ ‘00) Food Expenditure ($’00)
35 9 • The correlation coefficient tells us the strength and
49 15 direction of a linear relationship between two variables.
21 7
39 11 • To measure a linear correlation between two quantitative
15 5 variables, we use the Pearson correlation coefficient.
28 8
25 9
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CORRELATION ANALYSIS CORRELATION ANALYSIS

• r can only takes a value of between -1 and 1 i.e. -1 < r < 1

• The Pearson correlation coefficient is calculated as follows:
• How to determine the strength of a correlation based
on the value of r?
SS XY
r r value (ignore the sign) Interpretation
SS XX SSYY 0 No correlation
r  0.5 Weak/low correlation
where
 X  Y  0.5  r  0.7 Moderate correlation
 X Y , SS
2 2

SS XY   XY  XX
X2  , SSYY   Y 2  r  0.7 Strong/high correlation
n n n
1 Perfect correlation

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EXAMPLE 3 EXAMPLE 3

Refer to Example 1. Compute the Pearson coefficient of correlation

and interpret the result.

SS XY
 Y  _____  Y  _____  XY  _____  X  _____  X  _____ n  _____  r 
2 2

SS XX SSYY
SS XY   XY 
 X Y 
n
 X  2
Interpretation: There is a ______ , ________ linear correlation
SS XX   X 2  
n between __________ and ___________.
 Y 2
SSYY  Y 2  
n
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EXAMPLE 4 EXAMPLE 4

Refer to Example 2. Compute the Pearson coefficient of correlation

and interpret the result.

SS XY
 Y  _____  Y  _____  XY  _____  X  _____  X  _____ n  _____  r 
2 2

SS XX SSYY
SS XY   XY 
 X Y 
n
 X 2 Interpretation: There is a ______ , ________ linear correlation
SS XX   X 
2

n between __________ and ___________.
 Y 2

SSYY   Y 2 
n
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REGRESSION ANALYSIS • Regression analysis produces an equation

that express the dependent variable (Y)
as a function of independent variables (X).

• Regression analysis – analyze the relationship • The equation is called a linear regression
between dependent and independent variable (s). model.

• Simple linear regression – analyze the relationship • A regression model describes the
between one dependent variable and one independent relationship between the dependent and
variable. independent variables.

• Multiple linear regression – analyze the relationship • The regression line can be used to make
between one dependent variable and more than one a prediction about the value of y for a
independent variables. given value of x.

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ASSUMPTIONS OF A LINEAR
REGRESSION ANALYSIS
In general, a simple linear regression model
is written as:

y  A  Bx   1. The random error term,  has a zero mean.

Where y = Dependent variable 2. The random error terms are independent.

x = Independent variable
A = Y-intercept 3. The random error term is normally distributed.
B = Slope of the regression line /
Regression coefficient 4. The random error terms have a constant variance, σ2
 = Random error term

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• In the linear regression model, the values of • Interpretation of the regression coefficient:
A and B are unknown. Therefore, we have to
estimate their values by using the least
square method. a in the regression model means:
• The regression model with the estimated The value of y when x=0
values of A and B is called an estimated (If x=0 is in the range of the dataset)
regression model/regression line and is
written as follows, No practical meaning
(If x=0 is not in the range of the dataset)
ŷ = a + bx

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• By using the least square method, we can

b in the regression model means: estimate the values of A and B as follows:

The change in Y for a one unit change in X.

 xy 
 x  y 
SS xy n
b 
Positive values of b means, when X increase SS xx
x 2

 x  2

by 1 unit, Y increase by b units.

n
Negative values of b means, when X increase
by 1 unit, Y decrease by b units. y x
a  b  or a  y  bx
n  n 

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EXAMPLE 5 EXAMPLE 5

Refer to Example 1. Find the equation of the regression line and

interpret the values of the regression coefficient.

y x
From the previous calculation,
a  b 
 X  _____ Y  _____ SS xy  _____ SS xx  _____
n  n 

SS xy Interpretation:
 b 
SS xx
Interpretation:

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EXAMPLE 6 PREDICTION

Refer to Example 2. Find the regression equation and • Given a value of X, we can predict the value of Y by using
interpret the values of the regression coefficient. the estimated regression equation.

Example 7:

Using the equation of the regression line found in Example

5, predict the weight of a football player whose height is
72 inches.

Using the equation of the regression line found in Example

6, predict the expenditure of a household with income
$3500.
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COEFFICIENT OF
EXAMPLE 8
DETERMINATION

• Coefficient of determination, r2, measures the total Compute the coefficient of determination for Example 1.
variation in Y that is explained by the independent Interpret the values.
variable, X.
From the previous calculation,
SS xy
r2  b SS xy  _____ SS xx  _____ b  _____
SS yy
SS xy
 correlation coefficient, r  r 2  b
2

SS yy
• If r2 =0.80, this means that 80% of the total variation Interpretation:
in Y is explained by X.
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CHECKING THE
EXAMPLE 9
ASSUMPTION

Compute the coefficient of determination for Example 2. • To check the normality assumption, we use the normal
Interpret the values. probability plot or Q-Q plot.

From the previous calculation,

SS xy  _____ SS xx  _____ b  _____

SS xy
r 2  b
SS yy
Interpretation:

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CHECKING THE EXAMPLE 10

ASSUMPTION APRIL 2010

• To check the assumption of variance, we use the plot of

residual versus predicted values.

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EXAMPLE 10 EXAMPLE 10

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EXAMPLE 10 EXAMPLE 10

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EXAMPLE 11
EXAMPLE 11
OCTOBER 2010

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EXAMPLE 11 EXAMPLE 11

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EXERCISE 1 EXERCISE 1

Driving Experience Monthly Auto Insurance

(years) Premium
A random sample of eight drivers insured with a 5 64
company and having similar auto insurance 2 87
policies was selected. The following table lists 12 50
their driving experiences (in years) and monthly 9 71
15 44
auto insurance premiums.
6 56
25 42
16 60

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EXERCISE 1 EXERCISE 2

a) Construct a scatter diagram for the data. Table below lists the amount (in million of RM) spent on
advertising and the total sales (in millions of RM) for the
b) Compute SSxx, SSyy, and SSxy.
year 2007 for a sample of six different hotels:
c) Calculate r and r2 and explain the values obtained.
Advertising Total Sales
d) Obtain a regression equation using the least square Expenditure
method. 2.0 47
e) Interpret the meaning of the values of a and b 1.6 35
calculated in c). 1.0 23
f) Draw the equation above on the graph in a). 3.5 74
g) Predict the monthly auto insurance premium for a 1.2 26
driver with 10 years of driving experience. 4.5 85
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EXERCISE 2 EXERCISE 3

a) Construct a scatter diagram for the above data.
Comment on the diagram.
b) Compute/calculate the equation for the regression
line. Interpret the coefficient of the regression line.
c) Does the model useful in explaining the total sales?
If yes, give your reason.
d) Forecast the total sales of a hotel that plans to
spend RM5 million on advertising for the year 2010.
A regression analysis was done to examine the relationship
between the working experience (in years)of tourist
guides and their level of knowledge regarding the local
places of interest. The following table gives the knowledge
scores of 10 tourist guides and their working experience.

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EXERCISE 3 EXERCISE 3

Working Experience Knowledge Scores

15 80 a) Construct a scatter diagram for the above data.
8 72 Comment on the diagram.
23 89
b) Determine the correlation coefficient. Explain on the
value obtained.
18 79
c) Calculate the least squares regression line. Interpret
14 75
the coefficient of the regression line.
7 70
d) Calculate the coefficient of determination. Interpret
21 88 the value.
12 75 e) Estimate the knowledge score of tourist with 20
16 82 years of working experience.
10 72
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