Correlation Bi-variate data: Let (x1,y1),,(xn,yn) be n paired observations on two variables X and Y.

Such data are called bi-variate data. Ex: Potential sale of new product and its price. Family expenditure on travel and its income. Patients' weight and number of weeks he or she has been given a diet. Yield of a variety of wheat and rainfall.

Major objective of correlation analysis is to measure the extent of relationship between two variables. Objective of regression is to establish the relationship between the two variables, which can be further used for predicting one variable on the basis of given value of other variable.

Correlation Coefficient: For measuring the extent of

linear relationship between two variables X and Y,

we use the product moment correlation coefficient defined as
n 1 x X y Y i i n i 1 r xy n n 1 2 1 2 x X y Y i i n n i 1 i 1

The numerator is called the covariance between X and Y. Thus

cov( X , Y ) r xy

x y

Alternatively rxy can be written as

r xy

x y n X Y
i 1 i i

x n X
i 1 2 i

2 y n Y i 1 2 i

Result: -1rxy1. When rxy=1, we say that X and Y are perfectly (positively or negatively) correlated. When rxy=0, we say that X and Y are uncorrelated. Notice that rxy=ryx.