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CORRELATION NOTES (PROBABILITY & STATISTICS)

Correlation analysis is a statistical method used to measure the relationship between two variables, expressed through a correlation coefficient ranging from -1 to +1. It can be positive, negative, or zero, indicating the direction of the relationship, and is measured using techniques like scatter diagrams and correlation coefficients. The document also discusses different types of correlation, including linear and non-linear correlations, and provides examples to illustrate these concepts.

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Ajay Carter
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2 views

CORRELATION NOTES (PROBABILITY & STATISTICS)

Correlation analysis is a statistical method used to measure the relationship between two variables, expressed through a correlation coefficient ranging from -1 to +1. It can be positive, negative, or zero, indicating the direction of the relationship, and is measured using techniques like scatter diagrams and correlation coefficients. The document also discusses different types of correlation, including linear and non-linear correlations, and provides examples to illustrate these concepts.

Uploaded by

Ajay Carter
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1.0 CORRELATION ANALYSIS.

1.1 Introduction

Correlation is a statistical tool that helps to measure and analyses the degree of association/ relationship between
two variables.

The measure of correlation is called the correlation coefficient. The degree of relationship is expressed by
coefficient which range from -1 ≤ ≤ +1 . The direction of change is indicated by a sign.

The correlation analysis enables us to have an idea about the degree and direction of the relationship between the
two variables under study.

1.2 Positive, negative or zero correlation

Positive correlation-The correlation is said to be positive correlation if the values of two variables change in the
same direction. i.e as variable X increases , Y is increasing or as variable X is decreases , Y is decreasing.

Example- Price and quantity supplied- An increase in prices will result in increase in quantities supplied and vice-
versa.

Negative correlation- The correlation is said to be negative when the variables change in opposite direction. i.e as
variable X increases , Y decreases or as variable X decreases , Y increases.

Example- Price and quantity demanded - An increase in prices will result in decrease in in quantities demanded
and vice-versa.

Zero correlation- zero correlation means no r/ship between the two variables . i.e change in one variable(X) is not
associated with variable (Y)

1.3 TECHNIQUES OF MEASURING CORRELATION

Three important statistical tools used to measure correlation are :

i. Scatter diagram
ii. Karl person’s coefficient of correlation
iii. Spearman’s rank correlation.

1.31Scatter Diagram Method:


Scatter diagram or dot diagram is a graphic device for drawing certain conclusions about the correlation between
two variables.
In preparing a scatter diagram, the observed pairs of observations are plotted by dots on a graph paper in a two
dimensional space by taking the measurements on variable X along the horizontal axis and that on variable Y along
the vertical axis.
The placement of these dots on the graph reveals the change in the variable as to
whether they change in the same or in the opposite directions. It is a very easy,
simple but rough method of computing correlation.
The frequencies or points are plotted on a graph by taking convenient scales for the two series. The plotted points
will tend to concentrate in a band of greater or smaller width according to its degree. ‘The line of best fit’ is drawn
with a free hand and its direction indicates the nature of correlation. Similarly, if the lines move downward and its
direction is from left to right, it will show negative correlation.
The degree of slope will indicate the degree of correlation. If the plotted points are scattered widely it will show
absence of correlation. This method simply describes the ‘fact’ that correlation is positive or negative.
SCATTER DIAGRAMS

Examples of Correlation
Suppose we have measured the height and weight of 6 men. The results might be as follows:

Man Height Weight


(in) (lb)

A 66 150
B 72 159
C 65 138
D 69 145
E 64 128
F 70 165

A scatter diagram or scattergram is the name given to the method of representing these figures
graphically. On the diagram, the horizontal scale represents one of the variables (let’s say height)
while the other (vertical) scale represents the other variable ( weight). Each pair of measurements is
represented by one point on the diagram, as shown in Figure below:
Scattergram of Men’s Heights and Weights

Figure 1.4

Make sure that you understand how to plot the points on a scatter diagram, noting especially that:
ò Each point represents a pair of corresponding values.
ò The two scales relate to the two variables under discussion.
The term scatter diagram or scattergram comes from the scattered appearance of the points on the
chart.
Examining the scatter diagram of heights and weights, you can see that it shows up the fact that, by
and large, tall men are heavier than short men. This shows that some relationship exists between
men’s heights and weights. We express this in statistical terms by saying that the two variables,
height and weight are correlated. Figure 1.42 shows another example of a pair of correlated variables
(each point represents one production batch):
Cost of Production Compared with Impurity Contents

Figure 1.42

Here you see that, in general, it costs more to produce material with a low impurity content than it
does to produce material with a high impurity content. However, you should note that correlation
does not necessarily mean an exact relationship, for we know that, while tall men are usually heavy,
there are exceptions, and it is most unlikely that several men of the same height will have exactly the
same weight!

Degrees of Correlation
In order to generalise our discussion, and to avoid having to refer to particular examples such as
height and weight or impurity and cost, we will refer to our two variables as x and y. On scatter
diagrams, the horizontal scale is always the x scale and the vertical scale is always the y scale. There
are three degrees of correlation which may be observed on a scatter diagram. The two variables may
be:
(a) Perfectly Correlated
When the points on the diagram all lie exactly on a straight line (Figure 7.3):
Figure 1.43

(b) Uncorrelated
When the points on the diagram appear to be randomly scattered about, with no suggestion of
any relationship (Figure 7.4):

Figure 1.44
110 Correlation

(c) Partly Correlated


When the points lie scattered in such a way that, although they do not lie exactly on a straight
line, they do display a general tendency to be clustered around such a line (Figure 7.5):

Figure 1.45

Different Types of Correlation


There is a further distinction between correlations of the height/weight type and those of the
impurity/cost type. In the first case, high values of the x variable are associated with high values of
the y variable, while low values of x are associated with low values of y. On the scatter diagram
(Figure 1.46 (a)), the points have the appearance of clustering about a line which slopes up to the
right. Such correlation is called positive or direct correlation.
In the other case (like the impurity/cost relationship) high values of the x variable are associated with
low values of the y variable and vice versa; on the scatter diagram (Figure 1.46 (b)) the approximate
line slopes down to the right. This correlation is said to be negative or inverse.
Figure 1.46

(a) Linear Correlation


The correlation is said to be linear when the relationship between the two variables is
linear. In
other words all the points can be represented by straight lines. For example, the
correlation
between car ownership and family income may be linear as car ownership is related in a
linear
fashion to family income.
(b) Non-linear Correlation
Non-linear correlation is outside the scope of this course but it is possible that you could
be
required to define it in an examination question. It occurs when the relationship between
the
two variables is non-linear. An example is the correlation between the yield of a crop, like
carrots, and rainfall. As rainfall increases so does the yield of the crop of carrots, but if
rainfall
is too large the crop will rot and yield will fall. Therefore, the relationship between carrot
production and rainfall is non-linear.

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