Practical Exercise

The data below indicates the inflation rate and prime lending rate has been given for the last 7 years.

Inflation Rate % (x) 3.3 5.8 6.2 6.5 7.6 9.1 11

Prime Lending Rate % (y) 5.2 6.8 8.0 6.9 9.0 7.9 10.8

(a) Plot a scatter diagram for the given data and comment on the suitability for simple
regression analysis.

The data show a clear and nearly linear trend. Linear regression analysis seems reasonable.
(b) Calculate the correlation coefficient given:
Σx =386.79; Σy2= 444.94 and Σxy =410.14
2

Interpret your answer in the context of the question.

Σx= 49.5;Σy= 54.6

 x y 49.5 * 54.6
 xy  n
410.14 
7
r 
 x2  
 ( x) 2
.  y 2  
 ( y) 2 
 (386.79) 
49.5
2
(444.94) 
54.6
2

 n  n  7 7
  
410.14  386.1 24.04
   0.908
(386.79) 
49.5 2
(444.94) 
54.6 2
36.75 19.06
7 7

There is a strong positive relationship between inflation rate and prime lending rate, as inflation increases so
does prime lending rate.

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 Practical Exercise

(c) Calculate the coefficient of determination and interpret your answer in the context of the question.

r2 = 0.825;
So 82.5% of the variation in prime lending rate can be explained by the inflation rate. 17.5% is left
unexplained.

(d) Find the equation of the least-squares regression line, assuming that prime lending rate is the dependent
variable and inflation rate is the independent variable.Add the line to your scatter plot.

Σx= 49.5;Σy= 54.6

Y =a +bX

Mean X = 49.5 / 7 = 7.07

Mean Y = 54.6 / 7 = 7.8

410.14  386.1 24.04

   0.654
386.79 
49.5 2
36.75
7

(2 marks)

a= 7.8 – 0.654(7.07) = 3.176

(1.5 marks)
The regression equation of prime lending rate and inflation rate is given as:
Y = 3.18 + 0.65 X (1 mark)
Line to scatter plot (1.5 mark)

(e) What is the prime lending rate if the inflation is rate is 13.5%?
Prime lending rate = 3.18 + 0.65(13.5) = 11.96%

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 Practical Exercise

1. Two managers are asked to rank a group of employees in order of potential fro eventually becoming
top managers. The rankings are as follows:
Employees A B C D E F G H I J
Manger I Ranking 10 2 1 4 3 6 5 8 7 9
Manager II Ranking 9 4 2 3 1 5 6 8 7 10

Compute the coefficient of rank correlation and comment on the value.

6 ∑ 𝐷2
N = 10; ΣD2 = Σ (R1 – R2)2 = 14; R = 1 - 𝑁 ( 𝑁2 − 1)

R = 1 – 0.085 = 0.915
Thus we find that there is a high degree of positive correlation in the ranks assigned by the two managers.

A. Where ranks are not given

When we are given the actual data and not the ranks, it will be necessary to assign the ranks. Ranks can be
assigned by taking either the highest value as 1 or the lowest values as 1. But whether we start with the lowest
value or the highest value, we must follow the same method in case of all the variables.

2. Calculate the rank correlation coefficient for the following data of marks of 2 tests given to candidates
for a clerical job.
Preliminary 92 89 87 86 83 77 71 63 53 50
Test
Final Test 86 83 91 77 68 85 52 82 37 57

Preliminary Final Test

Test (X) R1 (Y) R2 D2 = (R1 - R2)2 6 ∑ 𝐷2
R = 1 - 𝑁 ( 𝑁2 − 1)
92 10 86 9 1
89 9 83 7 4 R = 1 – 0.267 = 0.733
87 8 91 10 4 There is a high degree of positive
86 7 77 5 4
correlation between preliminary and
83 6 68 4 4
77 5 85 8 9 final test.
71 4 52 2 4
63 3 82 6 9
53 2 37 1 1
50 1 57 3 4
ΣD2 44

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