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Correlation of coefficient

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Presented by:

Zahid Bashir

Meaning

Correlation is the relationship that exists between two or

more variables.

If two variables are related to each other in such a way

that change in one causes change in other, then they are

said to be correlated with each other.

Example

Relationship between height and weight

Relationship between amount of rainfall and yield of

rice

Relationship between price and demand of a commodity

Relationship between dose of insulin and blood sugar.

Definition of Correlation

Correlation.

In simple terms Correlation is the degree of association

between two or more variables.

If two or more quantities vary so that movements in one

tend to be accompanied by movements in other, then they

are said to be correlated.

Coefficient of correlation is a numerical measure of the

degree of association between two or more variables.

The existence of correlation between two (or more)

variables only implies that these variables:

1. Either tend to increase or decreased together

2. An increase (or decrease) in one is accompanied by the

corresponding decrease (or increase) in the other.

Correlation analysis does not answer the questions like

why there is cause and effect between two variables.

It may be due to following reasons:

One of the variable may be affecting the other. A correlation

calculated from the data on demand and price will only show

that degree of association between demand and price is high. It

will not show why it happens.

The two variables may act upon each other. Cause and effect is

here also, but it is difficult to find which variable is

independent and which is dependent.

The two variables may be acted upon by the outside influence.

Such correlation is called spurious or nonsense correlation.

A high value of the correlation may be due to sheet

coincidence ( or pure chance)

Types of Correlation

(1) Positive Correlation

(2) Negative Correlation

(3) Perfectly Positive Correlation

(4) Perfectly Negative Correlation

(5) Zero Correlation

Positive Correlation

When two variables move in the same direction then the correlation

between these two variables is said to be Positive Correlation.

When the value of one variable increases, the value of other value

also increases at the same rate.

For example the training and performance of employees in a

company.

Negative Correlation

opposite direction.

When the value of one variable increases, the value of

the other variable decreases.

For example, the relationship between price and

demand.

there is equal proportion of change in the other

variable say Y in the same direction, then these

two variables are said to have a Perfect Positive

Correlation.

causes the same amount of change in Y in equal

proportion

but

in

opposite

direction,

then this correlation is called as Perfectly Negative

Correlation.

Zero Correlation

change in one variable has no effect in other variable,

then the correlation between these two variable is

known as Zero Correlation.

Methods of

studying

correlation

Graphical

method

Scatter

diagram

Algebraic

method

Karl

Pearsons

method

Rank

method

Concurrent

deviation

relationship between two variables.

Assumptions of Karl Pearsons Coefficient:

1. There is linear relationship between variables.

2. There is cause and effect relationship

Karl Pearson Method

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