CORRELATION

Correlation
Correlation: The degree of relationship
between the variables under consideration is
measure through the correlation analysis.
The measure of correlation called the
correlation coefficient .
The degree of relationship is expressed by
coefficient which range from correlation ( -1
≤ r ≥ +1)
The direction of change is indicated by a sign.
The correlation analysis enable us to have an
idea about the degree & direction of the
relationship between the two variables under
study.
 Correlation
Correlation is a statistical tool
that helps to measure and
analyse the degree and direction
of relationship between two
variables.
Correlation analysis deals with
the association between two or
more variables.
 Types of Correlation
Type I

Correlation

Positive Correlation Negative Correlation

Types of Correlation Type I
Positive Correlation: The correlation is said
to be positive correlation if the values of two
variables changing with same direction.
Ex. Pub. Exp. & sales, Height & weight.
Negative Correlation: The correlation is said
to be negative correlation when the values of
variables change with opposite direction.
Ex. Price & qty. demanded.
 Direction of the Correlation
Positive relationship – Variables change in the
same direction.
 As X is increasing, Y is increasing Indicated by
 As X is decreasing, Y is decreasing
sign; (+) or (-).
E.g., As height increases, so does weight.
Negative relationship – Variables change in
opposite directions.
 As X is increasing, Y is decreasing
 As X is decreasing, Y is increasing

E.g., As TV time increases, grades decrease

 More examples
Positive relationships Negative
water relationships:
relationships
alcohol
consumption and
temperature. consumption and
study time and
driving ability.
Price & quantity
grades.
demanded
Types of Correlation
Type II

Correlation

Simple Multiple

Partial Total
 Types of Correlation Type II
Simple correlation: Under simple correlation
problem there are only two variables are
studied.
Multiple Correlation: Under Multiple
Correlation three or more than three variables
are studied. Ex. Qd = f ( P,PC, PS, t, y )
Partial correlation: analysis recognizes more
than two variables but considers only two
variables keeping the other constant.
Total correlation: is based on all the relevant
variables, which is normally not feasible.
Types of Correlation
Type III

Correlation

LINEAR NON LINEAR

 A perfect positive correlation
Weight
Weight
of B
Weight A linear
of A
relationshi
p

Height
Height Height
of A of B
High Degree of positive correlation
Positive relationship

r = +.80

Weight

Height
 Degree of correlation
Moderate Positive Correlation

r = + 0.4
Shoe
Size

Weight
 Degree of correlation
Perfect Negative Correlation

r = -1.0
TV
watching
per
week

Exam score
 Degree of correlation
Moderate Negative Correlation

r = -.80
TV
watching
per
week

Exam score
 Degree of correlation
Weak negative Correlation

Shoe
r = - 0.2
Size

Weight
 Degree of correlation
No Correlation (horizontal line)

r = 0.0
IQ

Height
 Degree Of Correlation:
Degree Positive Negative
Perfect +1 -1
High .75 to 1 -.75 to -1
Moderate .40 to .74 -.40 to -.74
Low 0 to +.39 0 to -.39
Zero 0 0
r = +.80 r = +.60

r = +.40 r = +.20
 Karl Pearson’s Coefficient of
Correlation denoted by- r
-1 ≤ r ≥ +1
 Degree of Correlation is expressed by a
value of Coefficient
 Direction of change is Indicated by sign

( - ve) or ( + ve)
Ex Find out Karl Pearson’s co-efficient of correlation
Height of Father(inch) Height of Son(inch)
65 67
66 68
67 65
67 68
68 72
69 72
70 69
72 71
72 71
Example:
Calculate the Karl Pearson’s coefficient of correlation
from the following data.

Marks in accountancy : 48 35 17 23 47

Marks in Statistics : 45 20 40 25 45
 Karl Pearson's
Coefficient of Correlation
A measure of the strength of the
linear relationship.

When deviation taken from an

assumed mean:
r= N Σxy - Σx Σy
√N Σx²-(Σx)² √N Σy²-(Σy)²
 Interpretation of Correlation
Coefficient (r)
The value of correlation coefficient ‘r’ ranges
from -1 to +1
If r = +1, then the correlation between the two
variables is said to be perfect and positive
If r = -1, then the correlation between the two
variables is said to be perfect and negative
If r = 0, then there exists no correlation
between the variables
 Assumptions of Pearson’s
Correlation Coefficient
There is linear relationship between
two variables, i.e. when the two
variables are plotted on a scatter
diagram a straight line will be formed
by the points.
Cause and effect relation exists
between different forces operating on
the item of the two variable series.
Advantages of Pearson’s Coefficient

It summarizes in one value,

the degree of correlation &
direction of correlation also.
 Limitation of
Pearson’s Coefficient

Always assume linear relationship

Interpreting the value of r is
difficult.
Value of Correlation Coefficient is
affected by the extreme values.
Time consuming methods
 Coefficient of Determination
The convenient way of interpreting the value of
correlation coefficient is to use of square of
coefficient of correlation which is called
Coefficient of Determination.
The Coefficient of Determination = r 2.
Suppose: r = 0.9, r2 = 0.81 this would mean
that 81% of the variation in the dependent
variable has been explained by the independent
variable.
 Spearman’s Rank Coefficient of
Correlation
When statistical series in which the variables
under study are not capable of quantitative
measurement but can be arranged in serial order,
in such situation pearson’s correlation coefficient
can not be used in such case Spearman Rank
correlation can be used.
R = 1- (6 ∑D2 ) / N (N2 – 1)
 R = Rank correlation coefficient
 D = Difference of rank between paired item in two series.
 N = Total number of observation.
 Spearman’s Rank Correlation Method:

• Where Ranks are given

• Where ranks are not given
Where ranks are given:

R=1– 6D2
N 3– N

Here D = differences of the two rank

Marks by Judge X Marks By Judge Y

52 65
53 68
42 43
60 38
45 77
41 48
37 35
38 30
25 25
27 50
 Regression Analysis
Regression Analysis is a very
powerful tool in the field of
statistical analysis in predicting
the value of one variable, given
the value of another variable,
when those variables are related
to each other.
 Regression Analysis
Regression Analysis is
mathematical measure of average
relationship between two or more
variables.
Regression analysis is a statistical
tool used in prediction of value of
unknown variable from known
variable.
The two basic types of
regression analysis are:
Simple regression analysis: Used to estimate
the relationship between a dependent variable and
a single independent variable; for example, the
relationship between crop yields and rainfall.
Multiple regression analysis: Used to estimate
the relationship between a dependent variable and
two or more independent variables; for example,
the relationship between the salaries of employees
and their experience and education.
Multiple regression analysis introduces several
additional complexities but may produce more
realistic results than simple regression analysis.
How Businesses Use
Regression Analysis Statistics
Seeing how a stock price is affected by changes
in interest rates
Regression analysis may also be used for
forecasting purposes; for example, a regression
equation may be used to forecast the future
demand for a company's products.
Assessing Risk
Linear regression can be used to analyze risk.
For example, a health insurance company
might conduct a linear regression plotting
number of claims per customer against age
and discover that older customers tend to
make more health insurance claims. The
results of such an analysis might guide
important business decisions made to account
for risk etc
Regression Analysis: Model
Assumptions
Model assumptions are stated in Terms of
the random errors, e, as follows:
the errors are normally distributed,
with mean = zero, and
constant variance s2e, that does not depend on
the settings of the driver variables, and
The errors are independent of one another.
This is often summarized symbolically as:
e is NID (0, s2e)
Uses of Regression Analysis
Regression analysis helps in establishing a functional
Relationship between two or more variables.
Since most of the problems of economic analysis are
based on cause and effect relationships, the
regression analysis is a highly valuable tool in
economic and business research.
Regression analysis predicts the values of dependent
variables from the values of independent variables.
We can calculate coefficient of correlation (r) and
coefficient of determination (R2) with the help of
regression coefficients.
 Regression line
For two variables X and Y, there are always two
lines of regression –
Regression line of Y on X : gives the best
estimate for the value of Y for any specific given
values of X
 Y = a + bx a = intercept
 b = Slope of the
line
 Y = Dependent
variable
 x= Independent
variable
Regression Equation / Line
& Method of Least Squares
Regression equation
^
Regression Equation: Y(Y-hat) = a
+ bX
Y(hat) is the predicted value of Y
given a certain X
b is the slope
a is the intercept
 Correlation analysis vs.
Regression analysis.
Regression is the average
relationship between two variables
Correlation need not imply cause &
effect relationship between the
variables understudy.- R A clearly
indicate the cause and effect relation
ship between the variables.