1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Simple Linear Regression Analysis Chapter 13

2. 13-2 Simple Linear Regression Analysis 13.1The Simple Linear Regression Model and the Least Square Point Estimates 13.2Model Assumptions and the Standard Error 13.3Testing the Significance of Slope and y- Intercept 13.4Confidence and Prediction Intervals 13.5Simple Coefficients of Determination and Correlation

3. 13-3 Simple Linear Regression Analysis Continued 13.6Testing the Significance of the Population Correlation Coefficient (Optional) 13.7An F Test for the Model 13.8The QHIC Case 13.9Residual Analysis (Optional) 13.10Some Shortcut Formulas (Optional)

4. 13-4 13.1 The Simple Linear Regression Model and the Least Squares Point Estimates The dependent (or response) variable is the variable we wish to understand or predict The independent (or predictor) variable is the variable we will use to understand or predict the dependent variable Regression analysis is a statistical technique that uses observed data to relate the dependent variable to one or more independent variables The objective is to build a regression model that can describe, predict and control the dependent variable based on the independent variable LO 1: Explain the simple linear regression model.

5. 13-5 The Least Squares Point Estimates Estimation/prediction equation y ̂ = b 0 + b 1 x Least squares point estimate of the slope β 1 Least squares point estimate of the y-intercept  0 LO 2: Find the least squares point estimates of the slope and y- intercept.

6. 13-6 13.2 Model Assumptions and the Standard Error 1. Mean of Zero At any given value of x, the population of potential error term values has a mean equal to zero 2. Constant Variance Assumption At any given value of x, the population of potential error term values has a variance that does not depend on the value of x 3. Normality Assumption At any given value of x, the population of potential error term values has a normal distribution 4. Independence Assumption Any one value of the error term ε is statistically independent of any other value of ε LO 3: Describe the assumptions behind simple linear regression and calculate the standard error.

7. 13-7 Sum of Squares Sum of squared errors Mean square error Point estimate of the residual variance σ 2 Standard error Point estimate of residual standard deviation σ LO3

8. 13-8 13.3 Testing the Significance of the Slope and y-Intercept A regression model is not likely to be useful unless there is a significant relationship between x and y To test significance, we use the null hypothesis: H 0 : β 1 = 0 Versus the alternative hypothesis: H a : β 1 ≠ 0 LO 4: Test the significance of the slope and y-intercept.

9. 13-9 Testing the Significance of the Slope #2 AlternativeReject H 0 Ifp-Value H a : β 1 > 0t > t α Area under t distribution right of t H a : β 1 < 0t < –t α Area under t distribution left of t H a : β 1 ≠ 0|t| > t α/2 * Twice area under t distribution right of |t| * That is t > t α/2 or t < –t α/2 LO3

10. 13-10 13.4 Confidence and Prediction Intervals The point on the regression line corresponding to a particular value of x 0 of the independent variable x is y ̂ = b 0 + b 1 x 0 It is unlikely that this value will equal the mean value of y when x equals x 0 Therefore, we need to place bounds on how far the predicted value might be from the actual value We can do this by calculating a confidence interval mean for the value of y and a prediction interval for an individual value of y LO 5: Calculate and interpret a confidence interval for a mean value and a prediction interval for an individual value.

11. 13-11 13.5 Simple Coefficient of Determination and Correlation How useful is a particular regression model? One measure of usefulness is the simple coefficient of determination It is represented by the symbol r 2 This section may be read anytime after reading Section 13.1 LO 6: Calculate and interpret the simple coefficients of determination and correlation.

12. 13-12 13.6 Testing the Significance of the Population Correlation Coefficient (Optional) The simple correlation coefficient (r) measures the linear relationship between the observed values of x and y from the sample The population correlation coefficient (ρ) measures the linear relationship between all possible combinations of observed values of x and y r is an estimate of ρ LO 7: Test hypotheses about the population correlation coefficient (optional).

13. 13-13 13.7 An F Test for Model For simple regression, this is another way to test the null hypothesis H 0 : β 1 = 0 This is the only test we will use for multiple regression The F test tests the significance of the overall regression relationship between x and y LO 8: Test the significance of a simple linear regression model by using an F test.

14. 13-14 13.9 Residual Analysis (Optional) Checks of regression assumptions are performed by analyzing the regression residuals Residuals (e) are defined as the difference between the observed value of y and the predicted value of y, e = y - y ̂ Note that e is the point estimate of ε If regression assumptions valid, the population of potential error terms will be normally distributed with mean zero and variance σ 2 Different error terms will be statistically independent LO 9: Use residual analysis to check the assumptions of simple linear regression (optional).

15. 13-15 13.10 Some Shortcut Formulas (Optional) where