INTRODUCTION

The correlation analysis refers to the technique used in

measuring the closeness of relationship between the variable.
Thus correlation is a statistical device which helps us in
analyzing the co- variation of two variables.

The problem of analyzing the relation between different series should

be broken into three step:

Determining whether a relation exist and, if it does,

measuring it.

Testing whether it is significant.

Establishing the cause and effect relation, if any

  
DEFINATIONS OF CORRELATION
1. “ analysis deals with the association between two or more variables”
-Simpson &Kafka
2. “if two or more quantities vary in sympathy so that movements in one tend to be
accompanied by corresponding movement in the other(s) then they are said to be
correlated”
-L.R. Conner

3. “When the relationship is of a quantitative nature, the appropriate statsistical tool for
discovering and measuring the relationship and expressing it in brief formula is known
as correlation”
Croxton & Cowden

4. “ correlation analysis attempts to determine the ‘degree of relationship’ between two

variables”
-Ya Lun Chou
5. “correlation is an analysis of the covariation between two or more variable”
-A.M Tuttle
6. “the effect of correlation is to reduce the range of uncertainty of our prediction. The
prediction based on correlation analysis will be more reliable and near to reality”
-Tippet
 EXAMPLES:

1. Relationship between income and consumption

expenditure
2. Relationship between sales revenue and advertising
expenditure or investment on R&D
3. Relationship between price and demand
4. Relationship between rate of inflation and gold price
5. Relationship between price and supply
6. Relationship between demand and supply
7. Relationship between rainfall and agriculture product
8. Correlation between the height and weight of a person
9. Correlation between income and sales
10. Correlation between production and price
 Types of correlation
There are four broad types of correlation:

1) Positive and negative

2) Simple and multiple

3) Partial and total

4) Linear and non-linear

1. Positive and negative

a).
Positive or direct correlation: refers to the movement of
variable in the same direction. The correlation is said to be
positive when the increase (decrease) in the value of one variable
is accompanied by an increase(decrease) in the value of other
variable. This sort of correlation exists between supply and price
of commodity. Positive correlation indicates the movement of two
variable in the same direction , that is, both variable are either
increasing or decreasing.

Positive correlation
X: 10 12 15 18 20
Y: 15 20 22 25 37
Negative or inverse correlation:
Refers to the movement of variable in opposite direction.
Correlation is said to be negative, if an increase(decrease) in the
value of one variable is accompanied by a decrease(increase) in
the value of other.
Such correlation is found between sale of woolen garments and
day temperature. In short if the movement of variable is in the
opposite direction, that is, one variable is increasing and other
is decreasing, then the correlation is negative.

 
Negative correlation
X: 20 30 40 60 80
Y: 40 30 22 15 10
2.SIMPLE AND MULTIPLE:
 
The distinction between simple and multiple
correlation is based upon the variables studied.

a).Multiple:

When two or more variables are studied it is a

problem of multiple correlation. In multiple
correlation three or more variables are studied
simultaneously

b).Simple:
Under simple correlation, the relationship is confined
to two variables, between, say, the yield of wheat and
the use of chemical fertilizer, or between the money
supply and the general price level.
For an example: when we studied the relationship between the
yield of wheat may be examined with reference to say, chemical
fertilizer and pesticides. It is a problem of multiple correlation.

3.PARTIAL AND TOTAL:

There are two types of multiple correlation analysis.

a).Under partial correlation: the relationship of two or more

variable is examined excluding other variable included for
calculation of total correlation. In partial correlation we recognize
more than two variable, but consider two variable to be
influencing each other ,the effect of other influencing variable
being kept constant.
For example: in rice problem if we limit our correlation
analysis of yield and rainfall to periods when certain average
daily temperature existed it become a problem relating to simple
correlation.
b).The total correlation:
is based on the all the relevant variables, however is normally
not feasible.
4.LINEAR AND NON-LINEAR
The distinction between linear and non-linear is based upon
the ratio of change between the variables under study.
a).LINEAR
When variation in the value of two variables have a constant
ratio there will be linear correlation between them, Correlation,
generally speaking, refers to a linear relationship. The graph of
variable having such a relationship will form a straight line. In
short if the amount of change in one variable tend to bear constant
ratio to the amount of change in the other variable then the
correlation is said to be linear.
For example:
X: 10 20 30 40 50
Y: 70 140 210 280 350
b).NON-LINEAR
In non-linear or curvi-linear correlation, the amount
of change in one variable does not bear a constant ratio to
the amount of change in the other related variable.

For example: when we double the use of fertilizer, the

production of paddy would not be necessarily double.

For example

X: 45 50 55 60 65 70
Y: 8 15 25 30 38 45
 METHODS OF CORRELATION

1) Scatter diagram

2) Karl Pearson’s coefficient of correlation

3) Spearman’s rank correlation

1.Scatter Diagram
Scatter diagram is a graphic presentation of
bivariate data. It is quick at a glance method of
determining an apparent relationship between two
variables.

A scatter diagram can be obtained on the graph

paper by plotting known pairs of value of variable
x and y, taking the independent variable value on
the x-axis and the dependent variable value on the
y-axis. The relationship between the two variables
x and y described by data point is defined by
straight line.
Merits and demerits of this method:

1) It is a simple and non-mathematical method of studying

correlation between the variable
2) It is not influenced by the size of extreme item whereas most
of the mathematical method of finding correlation are
influenced by extreme iteams.
 
Demerits

3) We cannot establish the exact degree of correlation between

the variable as is possible by applying the mathematical
method
 
2. KARL PEARSON’S COEFFICIENT OF CORRELATION:
A mathematical method for measuring the intensity or the
magnitude of linear relationship between two variable series
we use correlation coeffient. This model is widely used in
practice. The Pearson's coefficient of correlation is denoted by
the symbol ‘r’. It is one of the very few symbol that are used
universally for describing the degree of correlation between
two series.

The formula for computing pearsian ‘r’ is :

r=
here , x=(x); y=(y)
= standard deviation of series X
= standard deviation of series Y
N= number of pair of observation
r= the (product moment) correlation coeffient.
 Merits
1. It is one of the popular method for measuring the coefficient of
correlation
2. The coefficient of correlation summarizes in one figure not
only the degree of correlationBut also the direction, i.e whether
correlation is positive or negative

Demerits:
3. The correlation coefficient always assume linear relationship
regardless of the fact whether the assumption is correct or not
4. Great care must be exercised in interpreting the value of this
coefficient as very often the coefficient is misinterpreted
5. The value of the coefficient is unduly affected by the extreme
items
6. It takes more time as compare to other method
 
 
Spearman’s rank correlation coefficient:
 
Karl pearson’s coefficient of correlation can be calculated only
if the
Characteristic under the study are quantitative- should be
numerically measurable. But, Spearman’s of rank correlation can
be calculated even if the characteristic under study are qualitative.
.
When we are dealing with quanlitative characteristic(attributes)
such as honesty, beauty, character, etc. which can be arranged
serially (as in ascending or descending order) using ranks. If two
series are Ranked according to two attributes, the correlation
coefficient between their Ranks is called rank correlation.
different cases of finding rank correlation

 When ranks are given

 When ranks are not given

 When there are repeated ranks

 
NEEED OF CORRELATION
 
To identify relationship of various factor and
decision variables
To estimate value of one variable for a given
value of other if both are correlated
To understand economic behavior and
market forces
To reduce uncertainty in decision making to
a large extent
 
Need of correlation for managers
Managers very often have to assess the degree of relationship and
variable.

For example: the marketing manager would like to know the degree of
relationship between advertising expenditure and sales volume. Normally we
expect positive relationship between sales and advertising expenditure. The
manager would like to know whether money spent on advertising justified in
terms of sales generated; suppose 10% increase in advertising expenditure will
result in how much extra sales volume?

 Are consumer perception of quality related to their perception of price

 How are the price and demand of different commodity related

 Marketing strategies of many organization are based on the analysis of

consumer expenditure in relation to age and income.

 Sometimes time itself is an important variable: for instance, the timing of

advertising and promotional activities for patent medicine is based on
the analysis of incidence of illness such as cold over a time.
 VARIABELS

Meaning
in simple variable means characteristic of an object.
 TYPE’S
Independent

Dependent
 EXAMPELS
Expenditure on Advertising Total Volume of sales

Annual income and family size Total yearly savings

Period of experience on No defects in the production run

operator

Sales Price of the product

Rain Fall Yield of crops

 DEGREE OF
CORRELATION
 “Correlation analysis attempts to
determine the degree of correlation
between the two variables” Ya Lun
Chou
The degree or the intensity of the relationship between values
of two variables can be ascertained by determining the values
of coefficient of correlation. This can be classified into
following:

 THERE IS PERFECT CORRELATION

BETWEEN VARIABLES

 LIMITED DEGREE OF CORRELATION

  ABSENCE OF CORRELATION
Degree of Positive Negative
correlation
Perfect +1 -1
correlation
Very high degree +0.9 or more -0.9 or more
of correlation
Fairly high From +0.75 to From-0.75 to 0.9
degree of +0.9
correlation
Moderate degree From +0.50 to From -0.50 to
of correlation +0.75 -0.75
Low degree of From +0.25 to From -0.25 to
correlation +0.50 -0.50
Very low degree Less than +0.25 Less than -0.25
of correlation
Absence of 0 0
correlation
 RELATIONSHIP OF
ASSOCIATION NOT CAUSE
AND EFFECT
"Correlation does not imply
causation”

It is a phrase used in science and

statistics to emphasize that correlation
between two variables does not
automatically imply that one variable
is the cause of the other variable.
 Correlation analysis is used as a
statistical tool to ascertain the
association between two variables

For example: the decrease in prices of the

two wheeler and the increase in no of
road accidents.
Points to be taken care taken care:
 Chance of coincidence
 Influence of one on the other or
mutually dependence
 Both being influence by third
variable
 REGRESSION
REGRESSION
LINES
LINES

Meaning

A SMOOTH CURVE IS FITTED TO THE SET OF PAIR DATA IN REGRESSION ANALYSIS

 REGRESSION EQUATIONS
Regression equations, also known as estimating equations which are
algebraic expressions of the regression lines. Since there are two
regression lines, there are two regression equations.

•The regression equation of x On Y is used to describe the

variations in the values of X for given changes in Y.

•The regression equation of Y on X is used to describe the

variation in the values of Y for given changes in X.
 Lines of Regression
•Line of regression of X on Y

It is the line which gives the best estimate

for the values of X for specified value of Y.
Regression equation for X on Y is
•Line of regression of Y on X
It is the line which gives the best
estimate for the values of Y for
specified value of X .
Regression equation for Y on X is:

Where X is mean of the X series and Y is the

mean of the Y series and bxy is known as
Regression co-efficient of X on Y
 GRAPHICAL REPRESENTATION OF
REGRESSION LINES:

•Choose any 2 values (preferably well apart) for

the unknown variables on the right hand side of
the equation.

•Using this compute other variables.

•Plot the pairs of values and draw a straight line

through the plotted points and give the following
conclusions.
•If r = 0 (variables uncorrelated), the two lines of
regression are perpendicular to each other.

• If r = ± 1, the two lines coincide. This leads us to the

conclusion that for higher degree of correlation.
1 2
  

DIFFERENCE BETWEEN REGRESSION AND CORRELATION

AND
APPLICATIONS OF CORRELATION AND REGRESSION TO BUSINESS.
 Difference between Regression and
Correlation

Correlation Regression
Correlation is merely a However in regression
tool to enables the analysis one of the
student to ascertain the variables is taken as the
degree of relationship dependent, and the
between two variables, other as the independent
therefore we cannot thus making it possible
distinguish that one of to be viewed as a cause
the variables is the cause and affect relationship
and the other its effect
In Correlation analysis In regression analysis,
rxy is a measure of the regression
direction and the coefficients bxy and
degree of relationship byx are not symmetric,
between the two i.e. bxy ≠ byx and hence
variables X and Y, rxy it makes a difference, as
and ryx are symmetric to which variable is
(rxy = ryx), i.e. it is dependent and
immaterial whether X independent when it
or Y is the dependent comes to regression
variable and the analysis.
independent variable.
coefficient is a The objective of
measure of co regression is to
variability between study the nature of
X and Y relationship
between the two
variables, so that the
value of one can be
read based on the
other.
Correlation Regression
coefficient is coefficients are
independent of dependent on
change of scale change of origin
and origin. but not on the
change of scale.
 There is only one thing
common in both regression
and correlation analysis
coefficient takes the same sign
in both the cases.
 Applications of Correlation and Regression to Business

 Progressive development in the methods of

science and philosophy has been characterized
by increase in the knowledge of relationship or
correlations. In nature also one finds
multiplicity of interrelated forces
 Once we know that two variables are closely
related, we can estimate the value of one
variable given the value of the other. This is
known with the help of regression analysis.
 Applications of Correlation and Regression to Business

 Progressive development in the methods of

science and philosophy has been characterized
by increase in the knowledge of relationship or
correlations. In nature also one finds
multiplicity of interrelated forces
 Once we know that two variables are closely
related, we can estimate the value of one
variable given the value of the other. This is
known with the help of regression analysis.
 Correlation analysis contributes to the understanding
of economic behavior, aids in locating the critically
important variables on which others depend, may
reveal to the economists the connection by which
disturbances spread and suggest to him the paths
through which the stabilizing forces may become
effective.
 In business, correlation analysis enables the executive
to estimate costs, sales, prices, and some other
variables, on the basis of some other series, with which
these costs, sales and prices may be functionally
related. Some of the guesswork can be removed from
the decisions when the relationship between a variable
to be estimated and one or more other variables on
which it depends are close and reasonably invariant.
 Most of the variables show some kind of relationship, for
example, there is a relationship between Price & Supply,
income and expenditure, etc. With the help of correlation
and we can figure the degree of relationship between the
variables.

 However it should be noted that coefficient of correlation is

one of the most widely used and also one of the most
widely abused statistical measure. It is it is abused in the
sense that, one sometimes, overlooks the fact that
correlation measures are nothing but the strength of linear
relationship and it does not necessarily imply a cause-effect
relationship.
 
 The effect of correlation is to reduce the range of
uncertainty. The prediction based on correlation analysis is
likely to be more valuable and near to reality.