1. Simple Linear Regression
In many scientific investigations, one is interested to find how something
is related with something else. For example the distance traveled and the time spent driving; one’s age and height. Generally, there are two types of relationships between a pair of variable: deterministic relationship and probabilistic relationship.
Deterministic relationship
distance
S: distance travel
S0: initial distance
v: speed
t: traveled v
slope S0
intercept
time

2. Probabilistic Relationship
In many occasions we are facing a different situation. One variable is
related to another variable as in the following.
age
height
Here we can not definitely predict one’s height from his age as we did in

3. Here, x is called independent variable y is called dependent variable
Linear Regression
Statistically, the way to characterize the relationship between two variables
as we shown before is to use a linear model as in the following:
Here, x is called independent variable
y is called dependent variable
 is the error term
a is intercept
b is slope
Error:  y b a x

4. Least Square Lines
Given some pairs of data for independent and dependent variables,
we may draw many lines through the scattered points x y
The least square line is a line passing through the points that minimize the
vertical distance between the points and the line. In other words, the least
square line minimizes the error term .

5. Least Square Method
For notational convenience, the line that fits through the
points is often written as
The linear model we wrote before is
If we use the value on the line, ŷ , to estimate y, the difference is (y- ŷ)
For points above the line, the difference is positive, while the difference
is negative for points below the line. ŷ y
(y- ŷ)

6. Error Sum of Squares
For some points, the values of (y- ŷ) are positive (points above the line) and for some
other points, the values of (y- ŷ) are negative (points below the line). If we add all
these up, the positive and negative values can get cancelled. Therefore, we take a
square for all these difference and sum them up. Such a sum is called the Error Sum
of Squares (SSE)
The constant a and b is estimated so that the error sum of squares is
minimized, therefore the name least square.

7. Estimating Regression Coefficients
If we solve the regression coefficients a and b from by minimizing SSE,
the following are the solutions.
Where xi is the ith independent variable value
yi is dependdent variable value corresponding to xi
x_bar and y_bar are the mean value of x and y.

8. Interpretation of a and b
The constant b is the slope, which gives the change in y (dependent variable) due to a
change of one unit in x (independent variable). If b> 0, x and y are positively correlated,
meaning y increases as x increases, vice versus. If b<0, x and y are negatively correlated.
b>0 x y a
b<0 x y a

9. Correlation Coefficient
Although now we have a regression line to describe the relationship between the
dependent variable and the independent variable, it is not enough to characterize
the relationship between x and y. We may see the situation in the following graphs.
(2) x y
(1) x y
Obviously the relationship between x and y in (1) is stronger than that in (2) even
though the line in (2) is the best fit line. The statistic that characterizes the strength
of the relationship is correlation coefficient or R2

10. How R2 is Calculated? y
If we use y_bar to represent y, the error is (y-y_bar). If we use ŷ to represents y, the error is (y- ŷ ). Therefore the error is reduced to (y- ŷ ). Thus (ŷ- y_bar )
is the improvement over using y_bar. This is true for all points in the graph. To account how much total improvement we get, we take a sum of all improvements, (ŷ -y_bar). Again we face the same situation as we did while calculating variance. We take the square of the difference and sum the squared difference for all points

11. R Square SST=SSR+SSE Regression Sum of Squares y Total Sum of Squares
R square indicates the percent variance in y explained by the regression.
We already calculated SSE (Error Sum of Squares) while estimating a and b. In fact,
the following relationship holds true:
SST=SSR+SSE

12. An Simple Linear Regression Example
The followings are some survey data showing how much a family spend on
food in relation to household income (x=income in thousand $, y=is percent of income left after spending on food)