BusinesS StatisticS

Correlation and Regression Analysis.

Correlation
Meaning.

Correlation is a statistical technique which describes the relationship between two or more
variables. Correlation analysis refers to the technique used in measuring the closeness of
relationship between the variables.

Definition.

According to A M Tutle “correlation is an analysis of covariance between two or more

variables”.

According to YA-LUN-CHOU “Correlation analysis attempts to determine the degree of

relationship between variables”.

Correlation Analysis.

Correlation analysis involves various methods and techniques used for studying and measuring
the extent of relationship between two variables.

Significance / Merits / uses of correlation.

1 The correlation coefficient helps in measuring the degree of relationship between the variables.

2 It helps in measuring the relation between one single variable.

3With the help of correlation we can estimate the future value.

4Correlation helps in the exact and near to reality prediction.

5 It helps to managers to estimate sales cost price and other criteria given the other variables.

6 It helps to estimate unknown variables with the known variables.

Types of correlation.

1. Positive Correlation.

The correlation is said to be e positive when the values of two variables changing with same
direction. ex production and sales on same direction. weight and height on same direction.

2.Negative Correlation.
 The correlation is said to be negative when the values of variables change with the opposite
direction. Ex- price and quantity always changing with opposite direction.

3. Partial Correlation.

In the partial correlation more than two variables are recognized but only two variables are
influence each other the effect of other influencing variable is kept constant.

4 .Simple Correlation.

Simple correlation means when only two variables are studied it is a case of simple correlation
ex- correlation between height and weight correlation between demand and price.

5 .Multiple Correlation

When more than two variables are studied for correlating it is a case of multiple correlation ex
marks of accountancy marks of statistics landmarks in mathematics related but study of accounts
and statistics.

6 .Total Correlation

When the correlation between all the variables under study are taken together for measuring
covariance’s search correlation is known as total correlation.

7 .linear correlation.

Correlation is said to be linear when the amount of change in one variable tends to line a
constant ratio to the amount of change in the other variable.

8 .Nonlinear correlation.

The correlation said to be nonlinear when the amount of change in one variable does not linear
constant ratio to the amount of change in the other variable.

9 .logical correlation

When the correlation between two variables is not only mathematically defined but also logically
sound too it is called logical correlation.

10. Illogical correlation

The correlation between two unrelated variables which can and though be determined
mathematically yet are not based on only logic called illogical correlation.

Methods of Correlation Coefficient.

1. Karl Pearson’s coefficient of correlation

2. Spearman’s rank correlation

3. Graphic method

4. Scattered diagram method

5. Concurrent deviation method.

Karl Pearson’s coefficient of correlation method.

Karl Pearson’s coefficient of correlation (r) is the measure of degree and strength of linear
relationship between x and y variables. it is the covariance of two variables by product of their
standard deviation. Karl Pearson’s coefficient of correlation formula is the most widely used
method of measuring linear relationship between two variables.

Merits of Karl Pearson’s correlation coefficient

1. Takes into account all values

2. More practical and popular

3. Numerically measures the. "r "

4. Measures the degree and direction of correlation

5. Facilitates comparison 6 further algebraic treatment is possible.

Demerits of Karl Pearson’s coefficient of correlation.

1. It assumes linear relationship between variables even though there is no such relationship

2. More time consuming

3. It is affected by extreme items

4. It is difficult to interpret

Interpretation of Correlation Coefficient.

When r = +1 Perfect positive correlation

When r = -1
When r is in between + 0.75 and +1
When r is in between - 0.75 and -1
When r is in between + 0.25 and + 0.75
When r is in between - 0.25 and - 0.75
When r is in between 0and + 0.25
When r is in between 0and - 0.25
When r is 0
Perfect negative correlation.
High degree of positive correlation
High degree of negative correlation
Moderate degree of positive correlation
Moderate degree of negative correlation.
Low degree of positive correlation
Low degree of negative correlation
No correlation