Multiple Regression in Excel
Multiple Regression in Excel is used to predict a variable (Y) based on another variable (X) or variables (X’s). In statistics, regression analysis is used to estimate the relationships between a dependent variable and one or more independent variables. Linear regression analysis is the most common form of regression, in which a straight line that most closely fits the data according to specific criteria.
In this section:
- What is Regression Analysis?
- How to Perform Regression Analysis in Excel?
- Interpretation of Regression Output in Excel.
- How to Predict a Variable Based on Other Variables?
- How to Predict Net Income for year 2023 and 2024?
1. What is Regression Analysis?
Regression analysis is a statistical tool used to study the relationship between two or more variables. It is used to investigate how a dependent variable depends on one or more independent variables. Regression analysis attempts to determine how the dependent variable is related to a series of other changing variables.
The main objective of regression analysis is to express the response variable as a function variable of the predictor variables.
Let’s have an example of linear regression, which is a linear relationship between response variable, Y, and the predictor variable, Xi, i=1, 2…., n of the form
where, betas are the regression coefficients (unknown model parameters), and epsilon is the error due to variability in the observed responses.
Example: Does the grade in accounting depend on grades in math and statistics and study hours?
We want to investigate whether hours studied, math proficiency, and knowledge in statistics have impact on grades in accounting class. We have the data for 10 students in the following table.
The model based on our data:
In plain English, the model suggests that the grade in Accounting is a function of study hours, grade in math, and grade in statistics.
2. How to perform Multiple Regression Analysis in Excel:
To perform regression analysis in excel, you have to use Analysis ToolPack, and follow the steps below:
Step 1: Open the data set –> Then click (1) Data Tab –> (2) click Data Analysis –> (3) select Regression –>click OK.
Step 2: Add input range:
We have two input ranges: (1) The dependent variable, Y, Grade in Accounting (C4:C14), and (2) the independent variables (D4:F14), X, Hours Study, grade in Math, and grade in Statistics..
In the Regression dialogue box, select C4:C14 as the Y Range, and select D4:F14 as the X Range. Check the Labels to display the names of the variables. In the output options, check New Worksheet Ply, which will returns the regression results in a new worksheet. Finally click OK.
After clicking OK, you will see the following table.
3. Explanation of the regression output in Excel:
Multiple R: 0.993: This is the multiple correlation between the dependent variable (Grade in Accounting) and three independent variables–Study hours, grade in math, and grade in statistics.
R-Square: 0.987: This is the percentage of the variance in the dependent variable explained by the independent variables. The R-Square value of 0.987 indicates that 98.7% of the variation in Accounting grade can be explained by the three variables. This R-Square is also called the coefficient of determination.
Adjusted R Square: 0.980. This R-Square value is adjusted for the number of independent variables in the model. This value is always smaller than the R-Square and will decrease when we use more independent variables.
Standard Error: 1.492: This is the distance between the regression line and the observation values. In our example, the observed values fall an average of 1.492 units from the regression line.
Observations: 10. This is the sample size of the dataset used to run the regression. In our example, it is 10. Intercept: 19.490: The coefficient for the intercept. The value of 19.49 means that the expected grade in Accounting will be 19.49 for a student who studies zero hours, have zero in math and statistics.
Coefficients: The coefficients for each independent variable tells us the expected change in the dependent variable, assuming the other independent variable remains constant.
For example, for each additional hour of study, the average grade in accounting is expected to increase by 1.83, assuming other variables remain constant.
P-values: The P-values indicate whether each independent variable is statistically significant. In our example, we can see that Hours Study is statistically significant (p-value=0.01) while grade in Math is not statistically significant at alpha=0.05.
The Estimated Regression Equation:
Now, we can write the estimated regression equation from the regression output as follows:
We can now use the equation to predict the grade in Accounting based on the changes in Hours Study, grades in Math, and Statistics.
4. How to predict a variable based on other variables:
To predict a dependent variable based other independent variables, we have to follow two steps:
Step 1: Estimate the Regression Equation from past data:
We have the past data as follows (In the table below):
Now, we run the regression by using Analysis ToolPack. We have done so in section 2 above. Now, we have the following Estimated Regression Equation:
We are given the following inform to predict the grade in accounting class for 3 students:
Step 2: Insert the values of independent variables to predict the grade in Accounting:
Now, we can insert the values in the equation and predict the grades in Accounting. For example, Alex’s grade is 88.444 and it has been calculated as follows:
=19.49+1.834*8+0.051*84+0.641*78
5. Predict Net Income for the year 2023 and 2024:
To predict a variable, we need to:
- Estimate the regression from historical data, and
- Have forecasted values of independent variables.
Let’s have an example data set, the company data. You can download the data from above link.
In the data set, we have financial information for the six variables as follows:
| Term | Definition |
| AT | Total Assets |
| CHE | Cash and Short-term Investment |
| COGS | Cost of Goods Sold |
| DP | Depreciation and Amortization |
| NI | Net Income (Loss) |
| SALE | Sales/Turnover |
These data are for the year 2021. We are also given the following estimated data for the year 2023 and 2024.
Requirements:
- What is the expected Net Income for the year 2023?
- What is the expected Net Income for the year 2024?
Answer: To answer these questions, we will follow two steps:
Step 1: Estimate the regression equation from historical data:
First, we need to run the regression to estimate the equation. To do so, (1) Data–> (2) Data Analysis –>(3) Input –> (4) check Labels –> (5) click OK.
After clicking OK, we find the following regression output.
Now write the estimated regression equation:
We are given the following forecasted data for the year 2023 and 2024. Based on these data, we need to calculate expected Net Income for the year 2023 and 2024.
We calculate the expected Net Income for the year 2023 as follows:
Your job: Can you calculate the expected Net Income for the year 2024?
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