Assignment # 01

Name:
Waqar Hussain
Registration No:
640-SE/BSEF/F19
Semester:
Summer S23
Batch:
Fall 19
Course:
Econometrics-1
Teacher:
Sir Muneeb
Institute:
Islamic International University Islamabad
Q. what are limitations of theory of linear correlation?
Ans. linear correlation:
It refers to a way of measuring how two things
change together in a straight-line manner. It tells us if there is a
relationship between two things, and if that relationship follows a
pattern where one increases as the other increases (positive correlation)
or one decreases as the other increases (negative correlation). The value
of the correlation can range from -1 to +1, where +1 means a perfect
positive relationship, -1 means a perfect negative relationship, and 0
means no relationship at all. However, it's important to remember that
correlation does not prove that one thing causes the other, only that they
are related in some way.

limitations of theory of linear correlation

The theory of linear correlation is a statistical concept used to measure
how two variables are related in a straight-line manner. While it is a
useful tool in many situations, it has its limitations:
1. Limited to Straight-Line Relationships: The theory of linear
correlation can only detect and measure relationships that follow a
straight-line pattern. If the relationship between the variables is not
linear, the correlation may not accurately represent the true
association.
2. Sensitive to Outliers: Outliers are extreme values that can
significantly affect the correlation coefficient, leading to
misleading results. One or a few unusual data points can make the
correlation seem stronger or weaker than it actually is.
3. Cannot Prove Causation: Correlation does not imply causation.
Even if two variables have a strong correlation, it doesn't mean that
one causes the other. There could be other factors at play that
influence both variables independently.
4. Limited to Bivariate Analysis: Linear correlation only examines the
relationship between two variables at a time. In real-world
situations, many factors can influence a phenomenon, and linear
correlation cannot capture all of them simultaneously.
 5. Assumes Linearity and Homoscedasticity: Linear correlation
assumes that the relationship between variables is constant
across all values, which may not always be the case. Additionally,
it assumes that the variability of the two variables is the same for
all values, known as homoscedasticity.
6. May Miss Nonlinear Relationships: If the actual relationship
between variables is nonlinear, the linear correlation may fail to
capture the true association, leading to incorrect interpretations.
7. Influenced by Scaling: The correlation coefficient is affected by the
scale of the variables. Changing the units or scaling of the data
can alter the correlation value, which can lead to
misinterpretations.
Conclusion
In conclusion, while linear correlation is a valuable tool for understanding
relationships between variables, it should be used with caution and
complemented by other statistical methods to gain a more
comprehensive understanding of complex data. It cannot prove
causation, and its accuracy can be influenced by outliers and
nonlinearity in the data.