The Concept of Linear Regression Essay Example | Topics and Well Written Essays - 500 words

The Concept of Linear Regression - Essay Example However, a multiple regression models comprises of a single independent variable with multiple independent variables. For instance, stock returns are dependent on interest rates, risk, dividend payout ratio and various other variables. The most common example of simple linear regression is market index model. It assumes that the returns on the stock are only dependent on market returns (Elton & Gruber, 2007). Observations of the market often reveal that as the market goes up, the stock also follows the same direction. This implies that stock returns are correlated with market returns thus we can relate it to the stock market index. An example of multiple regression is cited in the literature by Lusztig & Schwab (1970), where multiple regression analysis was used to estimate the insurance expenses (dependent variable), through commission, profit and contingencies and premium taxes (independent Variables). Minimum least (sum of squares) method is used to estimate the model for regression equation. The values are chosen in such a way that the (vertical) distances from the data points to the fitted lines are minimized (so that the line fits the data as closely as possible). The figure below shows the best-fitted line for a simple linear regression model. For instance, there is a general perception that there are indications that "soda and sweetened drinks are the main sources of calories in American Diet," therefore most of the nutritionists recommend that soft drinks can be detrimental to health if they are consumed excessively.