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Third, Regression Analysis Predicts Trends and Future Values

Regression is a statistical technique used to determine the relationship between variables. A scatter plot shows the relationship between two variables with points plotted on a graph. If the points cluster near a straight line, there is correlation. The regression line is the single line that best fits the data by minimizing the distance from the points. It can be used to predict future values and estimate relationships. The slope and y-intercept of the regression line determine if the relationship is positive, negative, or nonexistent. Residuals represent the differences between predicted and actual values.

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54 views2 pages

Third, Regression Analysis Predicts Trends and Future Values

Regression is a statistical technique used to determine the relationship between variables. A scatter plot shows the relationship between two variables with points plotted on a graph. If the points cluster near a straight line, there is correlation. The regression line is the single line that best fits the data by minimizing the distance from the points. It can be used to predict future values and estimate relationships. The slope and y-intercept of the regression line determine if the relationship is positive, negative, or nonexistent. Residuals represent the differences between predicted and actual values.

Uploaded by

Joyce Pascua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Regression

 Regression is a statistical measure used in finance, investing and other disciplines that
attempts to determine the strength of the relationship between one dependent variable
(usually denoted by Y) and a series of other changing variables (known as independent
variables).
 First, the regression might be used to identify the strength of the effect that the independent.
 Second, it can be used to forecast effects or impact of changes.
 Third, regression analysis predicts trends and future values.
Scatter Graph
 A scatter plot is a set of points plotted on a horizontal and vertical axes.
 Scatter plots are important in statistics because they can show the extent of correlation, if any,
between the values of observed quantities or phenomena (called variables). If no correlation
exists between the variables, the points appear randomly scattered on the coordinate plane. If a
large correlation exists, the points concentrate near a straight line. Scatter plots are useful data
visualization tools for illustrating a trend.

Regression Line

 A regression line is simply a single line that best fits the data (in terms of having the smallest
overall distance from the line to the points).
 Statisticians call this technique for finding the best-fitting line a simple linear regression analysis
using the least squares method.
 You basically draw a line that best represents the data points. It’s like an average of where all
the points line up. In linear regression, the regression line is a perfectly straight line
 The formula for the regression line is y = mx + b where:
 m is the slope of the line
 b is the y-intercept. where the line cuts the Y-axis
 X = independent variable
 Y = Bo + B2X + u, where:
 Bo = the intercept term; the value of Y when X is equal to zero.
B1 = gradient or slope of the regression line
u = residual

Positive Relationship

 By observing the B1, the relationship between the variables can be determined
 If Bi > 0, then there is a positive relationship
If there is a positive relationship, the graph will be illustrated like this

Hence, it can be interpreted that the more education a person attains, the higher the wage

Negative Relationship

 If B1<0 then there is a positive relationship


 The graph shall be illustrated as follows
 It can be observed that the regression line is down ward sloping from left to right.
In the context of the example beforehand the general trend is that the more educated an
individual then the less they earn in wages.

No relationship

 If there is no relationship between two variables, B1=0


 The graph shall be illustrated as follows
 It can be noticed that the line best fit cut through the data horizontally
Estimated Regression

 It can be used to make predictions for Y given X

Ex. Using the equation, Y=Mx+b, the given as are follows

Y= Wages

M= 1

X =no of years of education

b=5

Hence, Y = 5+1x

Ex. An individual has just finished high school and has 12 years of education, he would to make a
prediction of his hourly wage

Solution:

Y=Mx+b

Y = 5 + 1x

Y = 5+ 1(12)

Y = 5 +12

Y = 17

Residuals

 Distance between the best fit line to the observed values


 Difference between the actual value and predicted value
 Actual value of Y minus the predicted Y value
 Contains other factors that affect wages but are not included in the model
 Also known as the error

Ex. Using the given example beforehand, the hourly wage of the first individual was

Predicted to be 17 an hour. But in fact, the individual earns 22 per hour. It can be observed from the
illustration below that his data point which is the 22 is above the regression line.

Hence, the residual of the individual is 5.

In the context of the given example, other factors that may influence a person’s wage and
experience, IQ, Height, etc.

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