Regression analysis is the measure that is primarily used in finance and investi
ID: 3224952 • Letter: R
Question
Regression analysis is the measure that is primarily used in finance and investing to determine the strength of the relationship between one dependent variable and of other changing variables. The changing variables would be the independent variables. Regression analysis also helps investment and financial managers to value assets and get a better understanding between the different variables. This is good for commodity items and prices. Regression analysis can help predict sales for a company based on the change of weather, previous sales such as last month and last year as we well as GDP (gross domestic product) growth or other conditions.
You assessment is correct here.
In multiple regression can be used to see the impact the two or more independent (or explanatory) variables (or factors) on the value of a dependent variable.
These models can be used for predictive purposes, like forecasting.
The example you presented would be correct.
Question Now - what level of measurement should the indepedent variables be to create a viable model?
Explanation / Answer
At the center of regression is the relationship between two variables called the dependent and independent variables. For instance, suppose you want to forecast sales for your company and you've concluded that your company's sales go up and down depending on changes in GDP.
The sales you are forecasting would be the dependent variable because their value "depends" on the value of GDP and the GDP would be the independent variable. You would then need to determine the strength of the relationship between these two variables in order to forecast sales. If GDP increases/decreases by 1%, how much will your sales increase or decrease?
The major outputs you need to be concerned about for simple linear regression are the R-squared, the intercept and the GDP coefficient. The R-squared number in this example is 68.7% - this shows how well our model predicts or forecasts the future sales.