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Business Statistics

Correlation
6th September, 2013 Group No.11

Introduction
Correlation is technique used to measure relationship between to variables or more Correlation analysis shows us how to determine the nature & strength of relationship between two variables

Correlation Range
Correlation lies between +1 to -1 Zero correlation Neutral (No relationship ) -1 correlation Perfect -ve (Very Weak) +1 correlation Perfect +ve (Very Strong)

Types of Correlation
Correlation

Direct (Quantitative) Eg. Price Demand Ads Sales Karl Pearsons Coeff

Partial (Qualitative) Eg. Demand Income Spearmans Rank Coeff

Karl Pearsons Coeff is denoted by r Spearmans Rank is denoted by

Karl Pearson's correlation


Karl Pearson's coefficient of correlation is the measure of the strength of linear dependence between two variables. It is also called as Pearson's productmoment correlation coefficient. It is denoted by r. Its value always lies between -1 and +1.

It is given by the formula

example
student
1 2

Height in cm Weight (x) (y)


150 155 45 50

x
22500 24025

y
2025 2500

xy
6750 7750

3
4 5 sum

160
165 170 800

55
60 65 275

25600
27225 28900 128250

3025
3600 4225 15375

8800
9900 11050 44250

Application
( )( )
[ " (" ) )][ ( )] = = 1250

1250 1250 1250 =1 1250

INTERPRETATION
r= 0.5 r=0.6 r=0.8 r=0.9/more moderate +ve correlation good +ve correlation strong +ve correlation. spurious +ve correlation.

Spearmans Rank Correlation Coefficient


Spearmans correlation coefficient is used for qualitative data. It measures the strength of association between two ranked variables. It is the nonparametric(distribution-free) version of the Pearson product-moment correlation.

It is given by the formula

Where di = difference in paired ranks n = number of cases

Ranking the data


Given data-

English 56

75

45

71

61

64

58

80

76

61

Maths

66

70

40

60

65

56

59

77

67

63

RANK
English (mark) 56 75 45 Maths (mark) 66 70 40 Rank (English) 9 3 10 Rank (maths) 4 2 10

71
61 64 58

60
65 56 59

4
6.5 5 8

7
5 9 8

80
76 61

77
67 63

1
2 6.5

1
3 6

We then complete the following table:


English (mark) Maths (mark) Rank (English) Rank (maths) d d2

56
75 45 71 62 64 58 80 76 61

66
70 40 60 65 56 59 77 67 63

9
3 10 4 6.5 5 8 1 2 6.5

4
2 10 7 5 9 8 1 3 6

5
1 0 3 1 4 0 0 1 1

25
1 0 9 1 16 0 0 1 1

Where d = difference between ranks and d2 = difference squared.

We then calculate the following:

We then substitute this into the main equation with the other information as follows:

Interpretation
In a sample it is denoted by or rs and lies between: -1< <1
00-.19 very weak 20-.39 weak 40-.59 moderate 60-.79 strong 80-1.0 very strong

Some Real Life Examples


Rainfall and absenteeism -example of positive correlation Age and sleep-example of negative correlation
The size of your palm is negatively correlated with how long you will live . In fact, women tend to have smaller palms and live longer.

As the ocean level falls, the fish population size decreases. Heavy traffic correlates with the time of day. There is heavy traffic between 8:00 AM and 9:00 AM and again between 4:30 PM and 6:00 PM An increase in the rate of inflation causes goods to be more difficult to purchase, all other factors remaining unchanged;

Application 1:
The local ice cream shop keeps track of how much ice cream they sell versus the temperature on that day, here are their figures for the last 12 days:
Ice Cream Sales vs Temperature Temperature in Degrees 14.2 15.2 22.1 25.1 17.2 Ice Cream Sales(in thousand) 14 22 34.5 40.6 27

You can easily see that warmer weather leads to more sales, the relationship is good but not perfect.

Correlation is 0.968721

Application 2:
The following table gives the weights and waist sizes of 10 friends:
Weight(in kg) 87 65 52 94 87 79 Waist(in cm) 101 71 62 113 88 87

Correlation is 0.947286 We can conclude that there is good correlation between the weight and waist of the people

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