Industrial Statistics 2
Simple Linear Regression
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc.
Chap 13-2
Learning Objectives
In this chapter, you learn:
How to use regression analysis to predict the value of
a dependent variable based on an independent
variable
The meaning of the regression coefficients b0 and b1
How to evaluate the assumptions of regression
analysis and know what to do if the assumptions are
violated
To make inferences about the slope and correlation
coefficient
To estimate mean values and predict individual values
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-3
Correlation vs. Regression
A scatter plot can be used to show the
relationship between two variables
Correlation analysis is used to measure the
strength of the association (linear relationship)
between two variables
Correlation is only concerned with strength of the
relationship
No causal effect is implied with correlation
Scatter plots were first presented in Ch. 2
Correlation was first presented in Ch. 3
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-4
Introduction to
Regression Analysis
Regression analysis is used to:
Predict the value of a dependent variable based on
the value of at least one independent variable
Explain the impact of changes in an independent
variable on the dependent variable
Dependent variable: the variable we wish to
predict or explain
Independent variable: the variable used to predict
or explain the dependent
variable
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-5
Simple Linear Regression
Model
Only one independent variable, X
Relationship between X and Y is
described by a linear function
Changes in Y are assumed to be related
to changes in X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-6
Types of Relationships
Linear relationships
Y
Curvilinear relationships
Y
X
Y
X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
X
Chap 13-7
Types of Relationships
(continued)
Strong relationships
Y
Weak relationships
Y
X
Y
X
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X
Chap 13-8
Types of Relationships
(continued)
No relationship
Y
X
Y
X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-9
Simple Linear Regression
Model
Population
Y intercept
Dependent
Variable
Population
Slope
Coefficient
Independent
Variable
Random
Error
term
Yi 0 1Xi i
Linear component
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Random Error
component
Chap 13-10
Simple Linear Regression
Model
(continued)
Yi 0 1Xi i
Observed Value
of Y for Xi
Predicted Value
of Y for Xi
Slope = 1
Random Error
for this Xi value
Intercept = 0
Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
X
Chap 13-11
Simple Linear Regression
Equation (Prediction Line)
The simple linear regression equation provides an
estimate of the population regression line
Estimated
(or predicted)
Y value for
observation i
Estimate of
the regression
Estimate of the
regression slope
intercept
Yi b0 b1Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Value of X for
observation i
Chap 13-12
The Least Squares Method
b0 and b1 are obtained by finding the values of
that minimize the sum of the squared
differences between Y and Y :
2
2
min (Yi Yi ) min (Yi (b0 b1Xi ))
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-13
Finding the Least Squares
Equation
The coefficients b0 and b1 , and other
regression results in this chapter, will be
found using Excel or Minitab
Formulas are shown in the text for those
who are interested
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-14
Interpretation of the
Slope and the Intercept
b0 is the estimated average value of Y
when the value of X is zero
b1 is the estimated change in the
average value of Y as a result of a
one-unit change in X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-15
Simple Linear Regression
Example
A real estate agent wishes to examine the
relationship between the selling price of a home
and its size (measured in square feet)
A random sample of 10 houses is selected
Dependent variable (Y) = house price in $1000s
Independent variable (X) = square feet
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-16
Simple Linear Regression
Example: Data
House Price in $1000s
(Y)
Square Feet
(X)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-17
Simple Linear Regression
Example: Scatter Plot
House price model: Scatter Plot
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-18
Simple Linear Regression
Example: Using Excel
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-19
Simple Linear Regression
Example: Excel Output
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
house price 98.24833 0.10977 (square feet)
41.33032
Observations
ANOVA
The regression equation is:
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-20
Simple Linear Regression
Example: Minitab Output
The regression
equation is:
The regression equation is
Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297
T
P
1.69 0.129
3.33 0.010
house price = 98.24833 +
0.10977 (square feet)
S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%
Analysis of Variance
Source
Regression
Residual Error
Total
DF
1
8
9
SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-21
Simple Linear Regression Example:
Graphical Representation
House price model: Scatter Plot and Prediction Line
Slope
= 0.10977
Intercept
= 98.248
house price 98.24833 0.10977 (square feet)
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-22
Simple Linear Regression
Example: Interpretation of bo
house price 98.24833 0.10977 (square feet)
b0 is the estimated average value of Y when the
value of X is zero (if X = 0 is in the range of
observed X values)
Because a house cannot have a square footage
of 0, b0 has no practical application
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-23
Simple Linear Regression
Example: Interpreting b1
house price 98.24833 0.10977 (square feet)
b1 estimates the change in the average
value of Y as a result of a one-unit
increase in X
Here, b1 = 0.10977 tells us that the mean value of a
house increases by .10977($1000) = $109.77, on
average, for each additional one square foot of size
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-24
Simple Linear Regression
Example: Making Predictions
Predict the price for a house
with 2000 square feet:
house price 98.25 0.1098 (sq.ft.)
98.25 0.1098(200 0)
317.85
The predicted price for a house with 2000
square feet is 317.85($1,000s) = $317,850
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-25
Simple Linear Regression
Example: Making Predictions
When using a regression model for prediction,
only predict within the relevant range of data
Relevant range for
interpolation
Do not try to
extrapolate
beyond the range
of observed Xs
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-26
Measures of Variation
Total variation is made up of two parts:
SST
SSR
Total Sum of
Squares
Regression Sum
of Squares
SST ( Yi Y )2
SSR ( Yi Y )2
SSE
Error Sum of
Squares
SSE ( Yi Yi )2
where:
= Mean value of the dependent variable
Yi = Observed value of the dependent variable
Yi = Predicted value of Y for the given X value
i
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-27
Measures of Variation
(continued)
SST = total sum of squares
Measures the variation of the Yi values around their
mean Y
SSR = regression sum of squares (Explained Variation)
(Total Variation)
Variation attributable to the relationship between X
and Y
SSE = error sum of squares (Unexplained Variation)
Variation in Y attributable to factors other than X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-28
Measures of Variation
(continued)
Y
Yi
SSE = (Yi - Yi )2
SST = (Yi - Y)2
_
SSR = (Yi - Y)2
Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
_
Y
X
Chap 13-29
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
SSR regression sum of squares
r
SST
total sum of squares
2
note:
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
0 r 1
2
Chap 13-30
Examples of Approximate
r2 Values
Y
r2 = 1
r2 = 1
100% of the variation in Y is
explained by variation in X
r =1
2
Perfect linear relationship
between X and Y:
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-31
Examples of Approximate
r2 Values
Y
0 < r2 < 1
Weaker linear relationships
between X and Y:
Some but not all of the
variation in Y is explained
by variation in X
X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-32
Examples of Approximate
r2 Values
r2 = 0
No linear relationship
between X and Y:
r2 = 0
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
The value of Y does not
depend on X. (None of the
variation in Y is explained
by variation in X)
Chap 13-33
Simple Linear Regression Example:
Coefficient of Determination, r2 in Excel
SSR 18934.9348
r
0.58082
SST 32600.5000
2
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
41.33032
Observations
ANOVA
58.08% of the variation in
house prices is explained by
variation in square feet
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-34
Simple Linear Regression Example:
Coefficient of Determination, r2 in Minitab
The regression equation is
Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297
T
P
1.69 0.129
3.33 0.010
S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%
r2
Analysis of Variance
Source
Regression
Residual Error
Total
DF
1
8
9
SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
SSR 18934.9348
0.58082
SST 32600.5000
58.08% of the variation in
house prices is explained
by variation in square feet
Chap 13-35
Standard Error of Estimate
The standard deviation of the variation of
observations around the regression line is
estimated by
n
SSE
S YX
n2
i 1
(Yi Yi ) 2
n2
Where
SSE = error sum of squares
n = sample size
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-36
Simple Linear Regression Example:
Standard Error of Estimate in Excel
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
41.33032
Observations
ANOVA
S YX 41.33032
10
df
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Significance F
0.01039
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-37
Simple Linear Regression Example:
Standard Error of Estimate in Minitab
The regression equation is
Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297
T
P
1.69 0.129
3.33 0.010
S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%
S YX 41.33032
Analysis of Variance
Source
Regression
Residual Error
Total
DF
1
8
9
SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-38
Comparing Standard Errors
SYX is a measure of the variation of observed
Y values from the regression line
Y
small SYX
large SYX
The magnitude of SYX should always be judged relative to the
size of the Y values in the sample data
i.e., SYX = $41.33K is moderately small relative to house prices in
the $200K - $400K range
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-39
Assumptions of Regression
L.I.N.E
Linearity
The relationship between X and Y is linear
Independence of Errors
Error values are statistically independent
Normality of Error
Error values are normally distributed for any given
value of X
Equal Variance (also called homoscedasticity)
The probability distribution of the errors has constant
variance
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-40
Residual Analysis
ei Yi Yi
The residual for observation i, ei, is the difference
between its observed and predicted value
Check the assumptions of regression by examining the
residuals
Examine for linearity assumption
Evaluate independence assumption
Evaluate normal distribution assumption
Examine for constant variance for all levels of X
(homoscedasticity)
Graphical Analysis of Residuals
Can plot residuals vs. X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-41
Residual Analysis for Linearity
Y
Not Linear
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
residuals
residuals
Linear
Chap 13-42
Residual Analysis for
Independence
Not Independent
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
residuals
residuals
residuals
Independent
X
Chap 13-43
Checking for Normality
Examine the Stem-and-Leaf Display of the
Residuals
Examine the Boxplot of the Residuals
Examine the Histogram of the Residuals
Construct a Normal Probability Plot of the
Residuals
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-44
Residual Analysis for Normality
When using a normal probability plot, normal
errors will approximately display in a straight line
Percent
100
0
-3
-2
-1
Residual
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-45
Residual Analysis for
Equal Variance
Y
x
Non-constant variance
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
residuals
residuals
Constant variance
Chap 13-46
Simple Linear Regression
Example: Excel Residual Output
RESIDUAL OUTPUT
Predicted
House Price
Residuals
251.92316
-6.923162
273.87671
38.12329
284.85348
-5.853484
304.06284
3.937162
218.99284
-19.99284
268.38832
-49.38832
356.20251
48.79749
367.17929
-43.17929
254.6674
64.33264
10
284.85348
-29.85348
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Does not appear to violate
any regression assumptions
Chap 13-47
Measuring Autocorrelation:
The Durbin-Watson Statistic
Used when data are collected over time to
detect if autocorrelation is present
Autocorrelation exists if residuals in one
time period are related to residuals in
another period
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-48
Autocorrelation
Autocorrelation is correlation of the errors
(residuals) over time
Here, residuals show a
cyclic pattern, not
random. Cyclical
patterns are a sign of
positive autocorrelation
Violates the regression assumption that
residuals are random and independent
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-49
The Durbin-Watson Statistic
The Durbin-Watson statistic is used to test for
autocorrelation
H0: residuals are not correlated
H1: positive autocorrelation is present
n
(e e
i 2
i 1
2
e
i
i1
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
The possible range is 0 D 4
D should be close to 2 if H0 is true
D less than 2 may signal positive
autocorrelation, D greater than 2 may
signal negative autocorrelation
Chap 13-50
Testing for Positive
Autocorrelation
H0: positive autocorrelation does not exist
H1: positive autocorrelation is present
Calculate the Durbin-Watson test statistic = D
(The Durbin-Watson Statistic can be found using Excel or Minitab)
Find the values dL and dU from the Durbin-Watson table
(for sample size n and number of independent variables k)
Decision rule: reject H0 if D < dL
Reject H0
0
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Inconclusive
dL
Do not reject H0
dU
2
Chap 13-51
Testing for Positive
Autocorrelation
(continued)
Suppose we have the following time series data:
Is there autocorrelation?
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-52
Testing for Positive
Autocorrelation
(continued)
Example with n = 25:
Excel/PHStat output:
Durbin-Watson Calculations
Sum of Squared
Difference of Residuals
3296.18
Sum of Squared
Residuals
3279.98
Durbin-Watson
Statistic
1.00494
n
(e e
i 2
ei
i1
)2
3296.18
1.00494
3279.98
i 1
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-53
Testing for Positive
Autocorrelation
(continued)
Here, n = 25 and there is k = 1 one independent variable
Using the Durbin-Watson table, dL = 1.29 and dU = 1.45
D = 1.00494 < dL = 1.29, so reject H0 and conclude that
significant positive autocorrelation exists
Decision: reject H0 since
D = 1.00494 < dL
Reject H0
Inconclusive
dL=1.29
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Do not reject H0
dU=1.45
2
Chap 13-54
Inferences About the Slope
The standard error of the regression slope
coefficient (b1) is estimated by
S YX
Sb1
SSX
S YX
(X X)
where:
Sb1
= Estimate of the standard error of the slope
S YX
SSE
= Standard error of the estimate
n2
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-55
Inferences About the Slope:
t Test
t test for a population slope
Null and alternative hypotheses
Is there a linear relationship between X and Y?
H 0 : 1 = 0
H 1 : 1 0
(no linear relationship)
(linear relationship does exist)
Test statistic
t STAT
b1 1
Sb
d.f. n 2
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
where:
b1 = regression slope
coefficient
1 = hypothesized slope
Sb1 = standard
error of the slope
Chap 13-56
Inferences About the Slope:
t Test Example
House Price
in $1000s
(y)
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Estimated Regression Equation:
house price 98.25 0.1098 (sq.ft.)
The slope of this model is 0.1098
Is there a relationship between the
square footage of the house and its
sales price?
Chap 13-57
Inferences About the Slope:
t Test Example
H0: 1 = 0
H1: 1 0
From Excel output:
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
0.10977
0.03297
3.32938
0.01039
From Minitab output:
b1
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297
T
P
1.69 0.129
3.33 0.010
b1
Sb1
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Sb1
t STAT
b1 1
Sb
0.10977 0
3.32938
0.03297
Chap 13-58
Inferences About the Slope:
t Test Example
Test Statistic: tSTAT = 3.329
H0: 1 = 0
H1: 1 0
d.f. = 10- 2 = 8
/2=.025
Reject H0
/2=.025
Do not reject H0
-t/2
-2.3060
Reject H0
t/2
2.3060
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
3.329
Decision: Reject H0
There is sufficient evidence
that square footage affects
house price
Chap 13-59
Inferences About the Slope:
H: =0
t Test Example
0
H1: 1 0
From Excel output:
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
0.10977
0.03297
3.32938
0.01039
From Minitab output:
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297
T
P
1.69 0.129
3.33 0.010
p-value
Decision: Reject H0, since p-value <
There is sufficient evidence that
square footage affects house price.
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-60
F Test for Significance
F Test statistic:
where
MSR
FSTAT
MSE
MSR
SSR
k
MSE
SSE
n k 1
where FSTAT follows an F distribution with k numerator and (n k - 1)
denominator degrees of freedom
(k = the number of independent variables in the regression model)
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-61
F-Test for Significance
Excel Output
Regression Statistics
Multiple R
0.76211
R Square
0.58082
Adjusted R Square
0.52842
Standard Error
41.33032
Observations
ANOVA
MSR 18934.9348
FSTAT
11.0848
MSE 1708.1957
10
df
With 1 and 8 degrees
of freedom
SS
MS
F
11.0848
Regression
18934.9348
18934.9348
Residual
13665.5652
1708.1957
Total
32600.5000
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
p-value for
the F-Test
Significance F
0.01039
Chap 13-62
F-Test for Significance
Minitab Output
Analysis of Variance
Source
Regression
Residual Error
Total
DF
1
8
9
SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600
With 1 and 8 degrees
of freedom
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
FSTAT
p-value for
the F-Test
MSR 18934.9348
11.0848
MSE 1708.1957
Chap 13-63
F Test for Significance
(continued)
Test Statistic:
H 0 : 1 = 0
H 1 : 1 0
= .05
df1= 1
FSTAT
df2 = 8
Decision:
Reject H0 at = 0.05
Critical
Value:
F = 5.32
Conclusion:
= .05
Do not
reject H0
Reject H0
MSR
11.08
MSE
There is sufficient evidence that
house size affects selling price
F.05 = 5.32
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-64
Confidence Interval Estimate
for the Slope
Confidence Interval Estimate of the Slope:
b1 t / 2 S b
d.f. = n - 2
Excel Printout for House Prices:
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
At 95% level of confidence, the confidence interval for
the slope is (0.0337, 0.1858)
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-65
Confidence Interval Estimate
for the Slope
(continued)
Coefficients
Intercept
Square Feet
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
98.24833
58.03348
1.69296
0.12892
-35.57720
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Since the units of the house price variable is
$1000s, we are 95% confident that the average
impact on sales price is between $33.74 and
$185.80 per square foot of house size
This 95% confidence interval does not include 0.
Conclusion: There is a significant relationship between
house price and square feet at the .05 level of significance
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-66
t Test for a Correlation Coefficient
Hypotheses
H0: = 0 (no correlation between X and Y)
H1: 0 (correlation exists)
Test statistic
r -
t STAT
(with n
2 degrees of freedom)
2
1 r
n2
where
r r 2 if b1 0
r r 2 if b1 0
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-67
t-test For A Correlation Coefficient
(continued)
Is there evidence of a linear relationship
between square feet and house price at
the .05 level of significance?
H0: = 0
(No correlation)
H1: 0
(correlation exists)
=.05 , df = 10 - 2 = 8
t STAT
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
r
1 r2
n2
.762 0
1 .762 2
10 2
3.329
Chap 13-68
t-test For A Correlation Coefficient
(continued)
t STAT
r
1 r2
n2
.762 0
1 .762 2
10 2
3.329
Conclusion:
There is
evidence of a
linear association
at the 5% level of
significance
d.f. = 10-2 = 8
/2=.025
Reject H0
-t/2
-2.3060
/2=.025
Do not reject H0
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Decision:
Reject H0
Reject H0
t/2
2.3060
3.329
Chap 13-69
Estimating Mean Values and
Predicting Individual Values
Goal: Form intervals around Y to express
uncertainty about the value of Y for a given Xi
Confidence
Interval for
the mean of
Y, given Xi
Y = b0+b1Xi
Prediction Interval
for an individual Y,
given Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Xi
Chap 13-70
Confidence Interval for
the Average Y, Given X
Confidence interval estimate for the
mean value of Y given a particular Xi
Confidence interval for Y|X X :
i
Y t / 2 S YX hi
Size of interval varies according
to distance away from mean, X
1 (Xi X)2 1
(Xi X)2
hi
n
SSX
n (Xi X)2
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-71
Prediction Interval for
an Individual Y, Given X
Confidence interval estimate for an
Individual value of Y given a particular Xi
Confidence interval for YX X :
i
Y t / 2 S YX 1 hi
This extra term adds to the interval width to reflect
the added uncertainty for an individual case
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-72
Estimation of Mean Values:
Example
Confidence Interval Estimate for Y|X=X
Find the 95% confidence interval for the mean price
of 2,000 square-foot houses
Predicted Price Yi = 317.85 ($1,000s)
1
t
Y
S
0.025 YX
n
(X i X) 2
(X i X) 2
317.85 37.12
The confidence interval endpoints are 280.66 and 354.90,
or from $280,660 to $354,900
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-73
Estimation of Individual Values:
Example
Prediction Interval Estimate for YX=X
Find the 95% prediction interval for an individual
house with 2,000 square feet
Predicted Price Yi = 317.85 ($1,000s)
1
t
Y
S
1
0.025 YX
n
(X i X) 2
(X i X) 2
317.85 102.28
The prediction interval endpoints are 215.50 and 420.07,
or from $215,500 to $420,070
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-74
Finding Confidence and
Prediction Intervals in Excel
From Excel, use
PHStat | regression | simple linear regression
Check the
confidence and prediction interval for X=
box and enter the X-value and confidence level
desired
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-75
Finding Confidence and
Prediction Intervals in Excel
(continued)
Input values
Y
Confidence Interval Estimate for Y|X=Xi
Prediction Interval Estimate for YX=Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-76
Finding Confidence and
Prediction Intervals in Minitab
Confidence Interval Estimate for Y|X=Xi
Predicted Values for New Observations
New
Obs Fit SE Fit
95% CI
95% PI
1 317.8 16.1 (280.7, 354.9) (215.5, 420.1)
Values of Predictors for New Observations
New Square
Obs Feet
1
2000
Input values
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Prediction Interval Estimate for YX=Xi
Chap 13-77
Pitfalls of Regression Analysis
Lacking an awareness of the assumptions
underlying least-squares regression
Not knowing how to evaluate the assumptions
Not knowing the alternatives to least-squares
regression if a particular assumption is violated
Using a regression model without knowledge of
the subject matter
Extrapolating outside the relevant range
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-78
Strategies for Avoiding
the Pitfalls of Regression
Start with a scatter plot of X vs. Y to observe
possible relationship
Perform residual analysis to check the
assumptions
Plot the residuals vs. X to check for violations of
assumptions such as homoscedasticity
Use a histogram, stem-and-leaf display, boxplot,
or normal probability plot of the residuals to
uncover possible non-normality
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-79
Strategies for Avoiding
the Pitfalls of Regression
(continued)
If there is violation of any assumption, use
alternative methods or models
If there is no evidence of assumption violation,
then test for the significance of the regression
coefficients and construct confidence intervals
and prediction intervals
Avoid making predictions or forecasts outside
the relevant range
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-80
Chapter Summary
Introduced types of regression models
Reviewed assumptions of regression and
correlation
Discussed determining the simple linear
regression equation
Described measures of variation
Discussed residual analysis
Addressed measuring autocorrelation
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-81
Chapter Summary
(continued)
Described inference about the slope
Discussed correlation -- measuring the strength
of the association
Addressed estimation of mean values and
prediction of individual values
Discussed possible pitfalls in regression and
recommended strategies to avoid them
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..
Chap 13-82
