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BUSINESS RESEARCH METHOD

Session: 11

The Tallest Oak in the forest was once

just a little nut that held its ground.
.....

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Last sessions
Experimental Research

Agenda of this session

Exercise on Experiment
Correlation
Regression

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Experimental Research

EXERCISE ON EXPERIMENT

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CORRELATION

Product Moment Correlation

Product moment correlation, r, summarizes strength of

association between two metric (interval or ratio scaled)

variables, say X & Y.
It is an index used to determine whether a linear or

straight-line relationship exists between X & Y.

Proposed by Karl Pearson, also known as Pearson

correlation coefficient.
Also referred to as simple correlation, bivariate

correlation, or merely correlation coefficient.

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Product Moment Correlation

For a sample of n observations, X & Y, product moment
correlation (r) is :
n

i=1

r=

i=1

(X i - X ) (Y i - Y )

(X i - X )2

= 1

(Y i - Y ) 2

D iv is io n o f th e n u m er ato r an d d en o m in ato r b y (n - 1 ) g iv es

i=1

r=

i=1
=

(X i - X )( Y i - Y )
n -1

(X i - X ) 2
n -1

= 1
i

(Y i - Y ) 2
n -1

C OV x y
SxSy

Product Moment Correlation

r varies between -1.0 and +1.0.
Correlation coefficient between two variables will be

same regardless of their underlying units of

measurement

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A Nonlinear Relationship for Which r = 0

Y6
5
4
3
2
1
0

-3

-2

-1

Bivariate Correlation: Application

How strongly are sales related to advertising

expenditure?
Is there any association between market share and

size of sales force?

Are consumers perception of quality related to their

perception of prices?

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Partial Correlation
Partial correlation coefficient measures association

between two variables after controlling for, or adjusting

for, effects of one or more additional variables.

rx y . z =

rx y - (rx z ) (ry z )
1 - rx2z 1 - ry2z

Partial correlations have an order associated with them.

Order indicates how many variables are being adjusted or

controlled.

Partial Correlation
Simple correlation coefficient, r, has a zero-order, as it

does not control for any additional variables while

measuring association between two variables.
Coefficient rxy.z is first-order partial correlation coefficient,

as it controls for effect of one additional variable, Z.

A second-order partial correlation coefficient controls for

effects of two variables, and so on.

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Partial Correlation: Example

Correlation between Cereal consumption & Income is

0.28;
Correlation between Income & Household size is 0.48
Correlation between Cereal consumption & Household

size is 0.56
First-Order Partial Correlation between Cereal

consumption & Income, when effect of Household

size is constant, is 0.02

Partial Correlation: Application

How strongly sales are related to advertising expenditures

when the effect of price is controlled?

Is there an association between market share and size of

sales force after adjusting for the effect of sales

promotion?
Are consumers perceptions of quality related to their

perceptions of price when the effect of brand image is

controlled?

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Part Correlation Coefficient

Part correlation coefficient represents correlation

between Y & X when linear effects of other independent

variables have been removed from X but not from Y. Part
correlation coefficient, ry(x.z) is calculated as:

ry (x . z ) =

rx y - ry z rx z
1 - rx2z

Partial correlation coefficient is generally viewed as

more important than part correlation coefficient.

Nonmetric Correlation
Spearman's rho & Kendall's tau are two measures of

nonmetric correlation.
Both measures use rankings rather than the absolute

values of variables. Both vary from -1.0 to +1.0.

When the data contain a large number of tied ranks,

Kendall's seems more appropriate, otherwise

Spearman's rho should be preferred.

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BIVARIATE REGRESSION

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Regression
Examines associative relationships between a metric

dependent variable & one or more independent variables

in following ways:
Determine whether independent variables explain a significant

variation in dependent variable: whether a relationship exists.

Determine how much of the variation in dependent variable can be

explained by independent variables: strength of relationship.

Determine the structure or form of the relationship: mathematical

equation relating independent and dependent variables.

Predict values of the dependent variable.
Control for other independent variables when evaluating

contributions of a specific variable or set of variables.

Regression

Regression analysis is concerned with nature

& degree of association between variables &
does not imply or assume any causality.

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Regression
What is the purpose & goal Regression?
PURPOSE : Used primarily for Prediction
GOAL: Development of a Statistical Model to
PREDICT the values of an DEPENDENT or RESPONSE
variable (Y) based on at least one INDEPENDENT or
EXPLANATORY variable (X)

Bivariate Regression: Application

Can variation in sales be explained in terms of variation in

advertising expenditure?
What is the structure & form of this relationship, and can it be

modeled mathematically by an equation describing a straight line?

Can variation in market share be accounted for by the

size of sales force?

Are consumers perceptions of quality determined by their

perception of price?

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Statistics Associated with Bivariate

Regression Analysis
Bivariate regression model.
Coefficient of determination.

Estimated or predicted value.

Regression coefficient.

Statistics Associated with Bivariate

Regression Analysis
Scattergram.
Standard error of estimate.
Standard error
t statistic.

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Explaining Attitude Toward City of Residence

Respondent No Attitude Toward
the City

Duration of
Residence

Importance
Attached to
Weather

10

12

11

12

10

12

11

11

18

10

10

11

10

17

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Conducting Bivariate Regression Analysis

Plot Scatter Diagram
A scatter diagram, or scattergram, is a plot of values of

two variables for all cases or observations.

Most commonly used technique for fitting a straight line to

a scattergram is the least-squares procedure.

In fitting the line, the least-squares procedure minimizes

the sum of squared errors, e2 .

j

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Attitude

Plot of Attitude with Duration

9
6
3

2.25

4.5

6.75

11.25 13.5 15.75

18

Duration of Residence

Which Straight Line Is Best?

Line 1

Line 2

Line 3

Line 4

2.25 4.5

6.75

11.25 13.5 15.75 18

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Bivariate Regression
0 + 1X

Y
YJ
eJ

eJ

YJ

X1

X2

X3

X4

X5

Bivariate Regression
Multiple R

R2

Adjusted R2
Standard Error

0.93608
0.87624
0.86387
1.22329
ANALYSIS OF VARIANCE
Sum of Squares Mean Square

df
Regression
Residual
F = 70.80266

1
10

Variable

Duration
(Constant)

0.58972
1.07932

105.95222
105.95222
14.96444
1.49644
Significance of F = 0.0000

VARIABLES IN THE EQUATION

SEb
Beta ()
T
0.07008
0.74335

0.93608

8.414
1.452

Significance
of T
0.0000
0.1772

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Assumptions
Error term is normally distributed. For each fixed value of

X, distribution of Y is normal.
Means of all these normal distributions of Y, given X, lie

on a straight line with slope b.

Mean of error term is 0.
Variance of error term is constant. Variance does not

depend on values assumed by X.

Error terms are uncorrelated i.e. observations have been

drawn independently.

Thank You

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