Question

Regression analysis is used to analyze data that has two or more variables in order to investigate interdependence of the variables. Regression analysis is used in business to predict trends and analyze a variety of data types for business decision-making.

Describe the assumptions necessary to conduct statistical tests involving the hypothesized-regression model. Give examples for the practical application of regression analysis in business. Explain how the regression analysis is used to predict future performance of a business.

Answer 1

Answer-Regression analysis is a statistical method used for estimating the relationships between a dependent variable and one or more independent variables i.e.to determine whether one set of data depends on another set of data in a cause-and-effect relationship. It is also used in forecasting the future trend of a variable.

Underlying assumptions-

• The sample is a good representative of the total population.
• The independent variables are measured with no error.
• Deviations from the model have an expected value of zero, conditional on covariates:
• The variance of the residuals is constant across observations (homoscedasticity).
• The residuals are uncorrelated with one another. Mathematically, the variance–covariance matrix of the errors is diagonal.

Examples of practical application of regression analysis in business-

1. For forecasting and financial analysis in business—suppose a company wants to forecast how a change in the GDP could affect sales in future. Here change in GDPwill be the independent variable and predicted sales  will be the dependent variable .

2. To understand how the prices of substitutes affects the consumer behaviour for a certain product in a company. The price of substitute will be the dependent variable and consumer behaviour capturing variables will be the independent variables.

3. To analyse how different characteristic like age, gender, income, tastes etc. affects the price of a product. Here price will be the dependent variable and age, gender, income, tastes etc will be the independent variables.

Regression analysis to predict future performance of a business-

It is common in business analysis to use a regression to forcast the future sales of a product on the basis of various attributes like price, consumer demand,GDP etc. It helps in targetting future policy and strategy to improve the business.