Page 164 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 10

Regression

4.1 What is it?

 Regression analysis calculates a straight line relationship between two
variables (x and y) as follows:

 y = a + bx, where y is the dependent variable and x is the independent variable

4.2 Calculation

Step 1: calculate “b”

n ∑ xy – ∑ x ∑ y
 b = 2
2
(n ∑ x – ( ∑ x) )

Step 2: calculate “a”

 a = y – bx

4.3 Limitations over the use of linear regression

 The actual relationship between the two sets of figures may not be linear – use
the coefficient of determination to investigate further.

 Even if we have a high level of correlation, this may be due to "spurious"
correlation and the presence of other causal factors

 We need to be careful using the regression line to make forecasts outside of the
range of the original data ("extrapolation").

158