HOMEWORK (Use Deviation Method)

For a sample of 8 employees, a personnel director

has collected the following data on ownership of
company stock, y, versus years with the firm, x.

x (years) 6 12 14 6 9 13 15 9
y (Stock Units) 300 400 560 250 290 650 630 520

Determine Coefficient of correlation

Scatter Plot
 Coeff. of Correlation – Method 2

x y dx = x - 9 dy = y - 400 dxdy dx2 dy2

6 300 -3 -100 300 9 10000
12 400 3 0 0 9 0
14 560 5 160 800 25 25600
6 250 -3 -150 450 9 22500
9 290 0 -110 0 0 12100
13 650 4 250 1000 16 62500
15 630 6 230 1380 36 52900
9 520 0 120 0 0 14400
12 400 3930 104 200000
 Coeff. of Correlation – Method 2

8  3930 - 12  400
r 
8  104 - (12) 2 8  200000 - (400) 2

r  0.8464
 Spearman’s Rank Correlation
• Used when quantitative measures of certain factors
e.g. leadership ability, efficiency, honesty,
Intelligence etc. can not be fixed
• Individuals in the groups are arranged in order and
ranked
• If n is the number of paired ranks then the
Spearman’s Rank Correlation Coefficient is given by
6d 2
R  1-
n(n 2 - 1)
• Where d denotes the difference between the paired
ranks
• Three possibilities arise when we find the Rank
Correlation Coefficient from a given set of
observations

(1) Actual Ranks are Given

(2) Actual Ranks are Not Given

(3) Actual Ranks are not given and some

observations are Equal
 Spearman’s Rank Correlation
A group of ten executives are ranked according to their efficiency by
two Sr. Managers as follows. Do the two managers are in agreement
with each other?
Executive Rank by Manager 1 Rank by Manager 2
A 4 3
B 8 9
C 6 6
D 7 5
E 1 1
F 3 2
G 2 4
H 5 7
I 10 8
J 9 10
 Actual Ranks are Given
2
Executive Manager 1 Manager 2 d d
A 4 3 1 1
B 8 9 -1 1
C 6 6 0 0
D 7 5 2 4
E 1 1 0 0
F 3 2 1 1
G 2 4 -2 4
H 5 7 -2 4
I 10 8 2 4
J 9 10 -1 1
Sd² = 20
 Actual Ranks are Given

6  20
R 1- 2
 0 . 88
10(10 - 1)
 Actual Ranks are Not Given
An economist wanted to find out if there was any relationship
between the unemployment rate in a country and its inflation
rate. Data gathered from 7 countries for the year 2004 are
given below:
Country Unemployment Rate (%) Inflation Rate (%)
A 4.0 3.2
B 8.5 8.2
C 5.5 9.4
D 0.8 5.1
E 7.3 10.1
F 5.8 7.8
G 2.1 4.7

Using the rank correlation method, determine the relationship

between the two variables
 Actual Ranks are Not Given

UR % RANK IR % RANK d d²
A 4 3 3.2 1 2 4
B 8.5 7 8.2 5 2 4
C 5.5 4 9.4 6 -2 4
D 0.8 1 5.1 3 -2 4
E 7.3 6 10.1 7 -1 1
F 5.8 5 7.8 4 1 1
G 2.1 2 4.7 2 0 0
Sd² = 18
 Actual Ranks are Not Given

6  18
R  1- 2
 0 . 678
7(7 - 1)

The result shows a moderately high degree of

positive correlation between unemployment rate and
inflation rate of seven countries.
 Ranks are Equal

A group of 8 student obtained the following marks in Stats and

Accounting. Calculate Spearman’s rank correlation coefficient.
Student Statistics Accounting
A 25 50
B 30 40
C 38 60
D 22 40
E 50 30
F 70 20
G 30 40
H 90 70
 Ranks are Equal
2
Student Stats Acc. R1(stats) R2 (Acc) d d
A 25 50 2 6 -4 16
B 30 40 3.5 4 -0.5 0.25
C 38 60 5 7 -2 4
D 22 40 1 4 -3 9
E 50 30 6 2 4 16
F 70 20 7 1 6 36
G 30 40 3.5 4 -0.5 0.25
H 90 70 8 8 0 0
81.5
 Ranks are Equal
The formula applied in case of equal ranks is as follows

 (m
3
 m ) (m
3
 m2) 
6   d 2  1 1
 2
 .......... 
 12 12 
R  1-
n(n 2 - 1)

Where mi stands for number of items with same rank. It is added to

the sum of squared difference as many times as the number of such
groups of items with equal ranks are there.
Thus

 (2 3  2) (3 3  3) 
6  81.5   
 12 12  504
R  1- 2
 1  0
8(8 - 1) 504
 HOMEWORK
At a debate competition, ten contestants are ranked by three
Judges as follows. Use the rank correlation coefficient to discuss
which pair of judges have the nearest approach.
A B C D E F G H I J
J1 10 5 6 1 8 9 7 2 4 3
J2 8 6 3 7 4 1 9 10 5 2
J3 5 7 2 3 10 9 8 1 6 4
 Method of Concurrent Deviations
• A simple method which gives us a quick but crude idea of
correlation between two variables.
Steps:
1. Add three columns dx, dy and dx.dy to the table of
values.
2. Find out the direction of change of each value of x
variable as compared with the previous value and write in
‘dx’ column . If increasing denote by ‘+’, if decreasing,
denote by ‘ – ‘, if constant denote by 0.
3. Repeat the procedure for y variable and write the change
in dy column.
4. Multiply dx and dy and count the number of ‘+” signs in
dxdy column. This number is denoted by c.
5. Apply the following formula:

(2c  m)
rc   
m

Where,
rc  Coefficient of Correlation
and m  n - 1

Note: The sign of coefficient of correlation will be same as

sign of (2c – m).
 (2 X 0  6)
rc   
6
rc  - 1

There is a perfect negative correlation between

price and demand of the commodity.
 Example

Find the coefficient of correlation by the method of concurrent

deviations between the price and demand of a commodity.

Price (x) Demand (y) dx dy dx.dy

150 200
154 180 + - -
160 170 + - -
172 160 + - -
160 190 - + -
165 180 + - -
180 172 + - -

Clearly, c = 0 and m = 7 – 1 = 6
 HOMEWORK
2 2 2
J1 J2 J3 d(1.2) d(2.3) d(3.1)
A 10 8 5 4 9 25
B 5 6 7 1 1 4
C 6 3 2 9 1 16
D 1 7 3 36 16 4
E 8 4 10 16 36 4
F 9 1 9 64 64 0
G 7 9 8 4 1 1
H 2 10 1 64 81 1
I 4 5 6 1 1 4
J 3 2 4 1 4 1
200 214 60
R 1.2   0 . 21 R 2.3   0 . 30 R 3.1  0 . 64

Interpret the Results