Simple Linear Regression
Simple Linear Regression Model
Least Squares Method
Coefficient of Determination
Model Assumptions
Testing for Significance
Simple Linear Regression
Managerial decisions often are based on the
relationship between two or more variables.
Regression analysis can be used to develop an
equation showing how the variables are related.
The variable being predicted is called the dependent
variable and is denoted by y.
The variables being used to predict the value of the
dependent variable are called the independent
variables and are denoted by x.
Simple Linear Regression
Simple linear regression involves one independent
variable and one dependent variable.
The relationship between the two variables is
approximated by a straight line.
Regression analysis involving two or more
independent variables is called multiple regression.
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 + b1x +e
where:
b0 and b1 are called parameters of the model,
e is a random variable called the error term.
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.
Simple Linear Regression Equation
Positive Linear Relationship
E(y)
Regression line
Intercept Slope b1
b0 is positive
x
Simple Linear Regression Equation
Negative Linear Relationship
E(y)
Intercept
b0 Regression line
Slope b1
is negative
x
Simple Linear Regression Equation
No Relationship
E(y)
Intercept Regression line
b0
Slope b1
is 0
x
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.
Estimation Process
Regression Model Sample Data:
y = b0 + b1x +e x y
Regression Equation x1 y1
E(y) = b0 + b1x . .
Unknown Parameters . .
b0, b1 xn yn
Estimated
b0 and b1 Regression Equation
provide estimates of ŷ b0 b1 x
b0 and b1 Sample Statistics
b0, b1
Least Squares Method
• Least Squares Criterion
min (y i y i ) 2
where:
yi = observed value of the dependent variable
for the ith observation
y^i = estimated value of the dependent variable
for the ith observation
Least Squares Method
• Slope for the Estimated Regression Equation
b1 ( x x )( y y )
i i
(x x )
i
2
where:
xi = value of independent variable for ith
observation
yi = value of dependent variable for ith
_ observation
x = mean value for independent variable
_
y = mean value for dependent variable
Least Squares Method
y-Intercept for the Estimated Regression Equation
b0 y b1 x
Simple Linear Regression
Example: Reed Auto Sales
Reed Auto periodically has a special week-long sale.
As part of the advertising campaign Reed runs one or
more television commercials during the weekend
preceding the sale. Data from a sample of 5 previous
sales are shown on the next slide.
Simple Linear Regression
Example: Reed Auto Sales
Number of Number of
TV Ads (x) Cars Sold (y)
1 14
3 24
2 18
1 17
3 27
Sx = 10 Sy = 100
x2 y 20
Using Excel’s Chart Tools for
Scatter Diagram & Estimated Regression Equation
Reed Auto Sales Estimated Regression Line
30
25
Cars Sold 20
y = 5x + 10
15
10
5
0
0 1 2 3 4
TV Ads
Coefficient of Determination
• Relationship Among SST, SSR, SSE
SST = SSR + SSE
i
( y y ) 2
i
( ˆ
y y ) 2
i i
( y ˆ
y ) 2
where:
SST = total sum of squares
SSR = sum of squares due to regression
SSE = sum of squares due to error
Coefficient of Determination
The coefficient of determination is:
r2 = SSR/SST
where:
SSR = sum of squares due to regression
SST = total sum of squares
Sample Correlation Coefficient
rxy (sign of b1 ) Coefficient of Determination
rxy (sign of b1 ) r 2
where:
b1 = the slope of the estimated regression
equation ŷ b0 b1 x
Assumptions About the Error Term e
1. The error e is a random variable with mean of zero.
2. The variance of e , denoted by 2, is the same for
all values of the independent variable.
3. The values of e are independent.
4. The error e is a normally distributed random
variable.
Testing for Significance
To test for a significant regression relationship, we
must conduct a hypothesis test to determine whether
the value of b1 is zero.
Two tests are commonly used:
t Test and F Test
Both the t test and F test require an estimate of 2,
the variance of e in the regression model.
Testing for Significance
• An Estimate of 2
The mean square error (MSE) provides the estimate
of 2, and the notation s2 is also used.
s 2 = MSE = SSE/(n 2)
where:
SSE ( yi yˆ i ) 2 ( yi b0 b1 xi ) 2
Testing for Significance
• An Estimate of
• To estimate we take the square root of 2.
• The resulting s is called the standard error of
the estimate.
SSE
s MSE
n2
Testing for Significance: t Test
• Hypotheses
H0 : b1 0
H a : b1 0
• Test Statistic
b1 s
t where sb1
sb1 S( xi x ) 2
Testing for Significance: t Test
Rejection Rule
Reject H0 if p-value <
or t < -t or t > t
where:
t is based on a t distribution
with n - 2 degrees of freedom
Confidence Interval for b1
We can use a 95% confidence interval for b1 to test
the hypotheses just used in the t test.
H0 is rejected if the hypothesized value of b1 is not
included in the confidence interval for b1.
Confidence Interval for b1
• The form of a confidence interval for b1 is: t /2 sb1
is the
margin
b1 t /2 sb1 of error
b1 is the
point
estimator where t /2 is the t value providing an area
of /2 in the upper tail of a t distribution
with n - 2 degrees of freedom
Testing for Significance: F Test
Hypotheses
H0 : b1 0
H a : b1 0
Test Statistic
F = MSR/MSE
Testing for Significance: F Test
Rejection Rule
Reject H0 if
p-value <
or F > F
where:
F is based on an F distribution with
1 degree of freedom in the numerator and
n - 2 degrees of freedom in the denominator
Simple Linear Regression
Using the Estimated Regression Equation
for Estimation and Prediction
Computer Solution
Residual Analysis: Validating Model Assumptions
Residual Analysis: Outliers and Influential
Observations
Using the Estimated Regression Equation
for Estimation and Prediction
Confidence Interval Estimate of E(yp)
y p t /2 s y p
Prediction Interval Estimate of yp
y p t /2 sind
where:
confidence coefficient is 1 - and
t/2 is based on a t distribution
with n - 2 degrees of freedom
Confidence Interval for E(yp)
Estimate of the Standard Deviation of yˆ p
1 ( x p x )2
syˆ p s
n ( x i x )2
Prediction Interval for yp
Estimate of the Standard Deviation
of an Individual Value of yp
1 ( x p x )2
sind s 1
n ( x i x )2
Residual Analysis
If the assumptions about the error term e appear
questionable, the hypothesis tests about the
significance of the regression relationship and the
interval estimation results may not be valid.
The residuals provide the best information about e .
Residual for Observation i
y i yˆ i
Much of the residual analysis is based on an
examination of graphical plots.
Residual Plot Against x
If the assumption that the variance of e is the same
for all values of x is valid, and the assumed
regression model is an adequate representation of the
relationship between the variables, then
The residual plot should give an overall
impression of a horizontal band of points
Residual Plot Against x
y yˆ
Good Pattern
Residual
0
x
Residual Plot Against x
y yˆ
Nonconstant Variance
Residual
0
x
Residual Plot Against x
y yˆ
Model Form Not Adequate
Residual
0
x
Residual Plot Against x
Residuals
Observation Predicted Cars Sold Residuals
1 15 -1
2 25 -1
3 20 -2
4 15 2
5 25 2
Residual Plot Against x
TV Ads Residual Plot
3
2
Residuals
1
0
-1
-2
-3
0 1 2 3 4
TV Ads
Standardized Residuals
Standardized Residual for Observation i
y i yˆ i
syi yˆ i
where: syi yˆ i s 1 hi
1 ( x i x )2
hi
n ( x i x )2
Standardized Residual Plot
The standardized residual plot can provide insight
about the assumption that the error term e has a
normal distribution.
If this assumption is satisfied, the distribution of the
standardized residuals should appear to come from a
standard normal probability distribution.
Outliers and Influential Observations
Detecting Outliers
• An outlier is an observation that is unusual in
comparison with the other data.
• Minitab classifies an observation as an outlier if its
standardized residual value is < -2 or > +2.
• This standardized residual rule sometimes fails to
identify an unusually large observation as being
an outlier.
• This rule’s shortcoming can be circumvented by
using studentized deleted residuals.
• The |i th studentized deleted residual| will be
larger than the |i th standardized residual|.