BIVARIATE DATA ANALYSES Association Correlation Coefficient Is there an association between market share and size of sales force

ce where hard selling is concerned? Are consumers' perceptions of quality related to their perceptions of prices? Can coverage of miles be a good judge of the resale value of a used car? How are the prices and demands of different commodities related? Is there any significant association between performance and confidence?

Correlation Coefficient (r) is a statistic summarising the strength and direction of association between two metric (interval or ratio scaled) variables -1 r 1 r is an absolute number r is a symmetric measure of association r measures the strength of linear relationship r measures the direction of linear relationship Calculation of r assumes that the distributions of the two variables have the same shape. r is inflated/deflated and over/underestimates the population correlation coefficient, if the above assumption is violated.

r = 0 does not imply that the two variables have no relationship r = 0 there is no linear relationship and there may exist a non-linear relationship

The formula for correlation coefficient

Example:X Y 1 2 2 5 3 6

75

Scatter Plot Scatter diagram Scattergram

70 65 60 55 50 45 40 35 30 30 40 50 60

70

80

X Correlation is 0.033 (based on 20 observations) (Very low or negligible correlation)

75 70 65 60 55 50 45 40 35 30 30 40 50 60 70 80

Correlation is 0.603 (based on 20 observations)

75 70 65 60 55 50 45 40 35 30 30 40 50 60 70 80

Correlation is 0.893 (based on 20 observations) (Very high correlation, quite close to 1.0)

75 70 65 60 55 50 45 40 35 30 30 40 50 60 70 80 Correlation is 0.926 (based on 20 observations) Approximately 1.0 Near perfect linear relation between the 2 variables

X2

r (X1,X2 ) = - 0.827

X1 = a - bX2 X2 = c - dX1 X1 Measure the relationship between weekly number of times a student visits a library (L) and marks in his presentation (P), using the data: r (L, P) = - 0.237 L: 2 5 7 8 9 P: 8 9 8 9 7

Scatterplot
10 8 6 4 2 0 0 5 visits to Library 10 Series1

marks in Presentation

Regression Analysis for estimating and developing a statistical relationship between two types of variables dependent (regressand) and independent (regressor or explanatory) when the purpose is to determine what independent variable(s) contribute to the explanation of the dependent variable and to what degree for the purpose of predicting the values of the dependent variable for some given values of the independent variable(s)

Three fundamental aspects of regression Model selection - What is the most parsimonious set of predictors that explain the most variation in the response variable Evaluation of Assumptions - Have we met the assumptions of the regression model Model validation Examples: (1) Banking Policy Can Sales ($ million) of a bank, its Operating Margin (%) and its Debt/Capital (%) explain be a good judge of its Return on Capital (%)? Keeping other factors constant, what role does each of these variables play in explaining the variability in Return on Capital? For banks with specific Sales, Operating Margin and Debt/Capital, what is the expected Return on Capital?

(2) Sales Management How brand image, advertising expenditures, prices, and levels of distribution can explain much of the variation in sales? What is the contribution of advertising expenditure in explaining the variations in sales, when brand image, prices and level of distribution are controlled? What levels of sales may be expected given the levels of brand image, advertising expenditures, prices and distribution?

Simple Regression is a technique develops a mathematical relationship between an (interval-scaled or categorical) independent variable, X and an (interval-scaled) dependent variable, Y. Simple Regression Model: Y = 0 + 1X + e, Y = dependent variable, X = independent variable, 0, 1 = parameters of the regression model, partial regression coefficients e = error term Y 1 1 intercept 0 X

slope

Partial Regression Coefficients 0 the constant term 1, expected change in Y when X is changed by one unit R2 / Multiple R / Coefficient of multiple determination = the proportion of the total variation in Y, which is accounted for by the regression model (that is, the independent variables Xs) 0 R2 1 Multiple Regression is a technique that simultaneously develops a mathematical relationship between two or more interval-scaled or categorical independent variables (X1, X2,., Xk) and an interval-scaled dependent variable (Y) Multiple Regression Model Y= 0 + 1X1 + 2X2 + ... ... + kXk + e, where

Least Squares Method

Least Squares Criterion

min (y i y i )

yi = observed value of dependent variable for ith observation ^ yi = estimated value of dependent variable for ith observation Y

1 1 0

Estimated regression line

1 =

b1

( x x )( y y ) = (x x )
i i i 2

0 =

b0 = y b1 x

Example: Reed Auto periodically has a special week-long sale. As par of the advertising campaign Reed runs one or more television commercials during the weekend preceding the sale.

No. of TV Ads 1 3 2

No. of Cars Sold 14 24 18 17 27

Y = 10 + 5x

1 3

Interpret 10: even when there are no TV ads the expected number of cars sold will be 10. Interpret 5: expected increase in the number of cars sold is 5 is if the number of TV ads is increased by one unit. expected decrease in the number of cars sold is 5 is if the number of TV ads is decreased by one unit.