Correlation

Correlation is a statistical technique which is used to analyse the behavior of two or more
variables. Correlation is a measure of relationships between two variables.

DEFINITION :

Two quantities are said to be correlated if they vary in such a way that the movements in one are
accompanied by movements in the other.

Example : “Price" and “Purchasing power

TYPES OF CORRELATION

1. On the basis of direction

 Positive Correlation:
Eg. Demand & Supply
 Negative Correlation:
Eg. Price and Demand

2. On the basis of number of variables

 Simple Correlation: Correlation
Price and Demand.
 Multiple Correlation:
Total sales, Sales force and
Advertising Expenditure
 Partial Correlation
:
3. On the basis of ratio of change between the variables:
(1) Linear Correlation:
(2) Non-linear correlation
Positive and negative correlation : when both variables deviate in the same direction, the
correlation between two variable is said to be positive.

Example : An increase in price of the commodity results in an increase in the supply of that
commodity.

Negative correlation is a relationship between two variables in which one variable increases as
the other decreases, and vice versa.

Example : Fall in price of a commodity corresponds an increase in its demand.

Simple and multiple: Correlation between two variables is called simple correlation.

Example : The correlation between amount of money and price of commodity .

Partial and total correlation : In partial correlation we measure the correlation between two
variables by keeping the other variables constant.

In total correlation, we study the total effect of all the independent variables upon the dependent
variable.

Example : If we measure the correlation between the rice and fertilizer by keeping constant the
effect of hybrid seeds, pestisides and irrigation means then it is called as partial correlation.

When we consider all the factors then it will be total correlation.

Linear and non linear correlation: Correlation is said to be linear if the ratio of change is
constant. When the amount of output in a factory is doubled by doubling the number of workers,
this is an example of linear correlation.

Non Linear (Curvilinear) Correlation

Correlation is said to be non linear if the ratio of change is not constant. In other words, when all
the points on the scatter diagram tend to lie near a smooth curve, the correlation is said to be non
linear (curvilinear).
REGRESSION ANAYSIS
DEFINITION: Regression is a statistical measure used in finance, investing and other disciplines
that attempts to determine the strength of the relationship between one dependent variable
(usually denoted by Y) and a series of other changing variables (known as independent
variables).

 It is a statistical tool for measuring the average relationship between two or more
variables.
 Regression analysis attempts to establish the functional relationship between the variables
and thereby provide mechanism for prediction or forecasting.