1.0
.5
+.5
+1.0
Sample covariance
Is a measure of how two variables move together. For a sample of n pairs of data (xi,yi), the sample covariance is defined as Sxy= [ (xi-x)(yi-y ) ]/(n-1)
-
Coefficient of Correlation
r SS xy SS xx SS yy
2
where
SS xx x
x
n
SS yy y
SS xy xy
n x y n
Solution Table
xi
1 2 3 4
yi
1 1 2 2
2 xi
2 yi
xiyi
1 2 6 8
1 4 9 16
1 1 4 4
5
15
4
10
25
55
16
26
20
37
x
n
(15) 2 55 10 5
(10) 2 SS yy y 2 26 6 n 5 x y 37 (15)(10) 7 SS xy xy n 5
SS xy SS xx SS yy
7 .904 10 6
Solution Table*
xi
4
6 10
yi
3.0
5.5 6.5
xi
2 yi
xiyi
12
33 65
16
36 100
9.00
30.25 42.25
12
32
9.0
24.0
144
296
81.00
162.50
108
218
x
n
(32) 2 296 40 4
SS xy SS xx SS yy
26 .956 40 18.5
Advertising Sales
Sales 30146353
Advertising
Advertising Sales 1 0.971711
Sales
1
Sales
But we dont know what sales response we might expect for a given level of advertising?
Correlation Models
Answers How strong is the linear relationship between two variables? Coefficient of correlation
Sample correlation coefficient denoted r Values range from 1 to +1 Measures degree of association Does not indicate causeeffect relationship
Regression Analysis
Sales = 4.694 (advertising) + 49492 This model suggests that as advertising increases, sales increases proportionately. RA allows us to develop models that describe the relationships between a dependent variable and one or more independent variables to use for estimation or prediction. As well as to test the significance of the relationship statistically.
1
2
3
Multiple R is correlation coefficient Adjusted R square reflects the sample size and is useful when comparing this model with others that include additional variables. R Square or coefficient of determination, provides a measure of how well a regression line fits the data.
yi
yi
SSE
yi
yi
SST
yi
y
SSR
R 2 = SSR/SST
yi
SST = SSE + SSR and R 2 = SSR/SST it indicates the fraction of the total variation in the dependent variable about its mean that is explained by the regression line.
0R21
R2 = 0 (NONE OF THE VARIATION IS EXPLAINED BY THE REGRESSION LINE)
R2 = 1 ( ALL THE VARIATION EXPLAINED BY REGRESSION LINE THAT IS ALL THE DATA IS ON REGRESSION LINE)