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CORRELATION & REGRESSION

Correlation:-
If the changes in one variable affects and changes in other variable then the variables are called
Correlated Variables. The relation is called Correlation.
Types of Correlation:-
Positive Correlation, Negative Correlation and Zero Correlation.
Simple and Multiple Correlation.
Partial and Total Correlation.
Linear and Non-Linear Correlation.
Positive Correlation:-
If increases in one variable cause the increasing in the other variable then the variables are called as
Positive Correlation. Or if decreases in one variable cause the decreasing in the other variable then
the variables are called as Positive Correlation.
X Y


Negative Correlation:-
If increases in one variable cause the decreasing in the other variable then the variables are called as
Negative Correlation. Or if decreases in one variable cause the increasing in the other variable then
the variables are called as Negative Correlation.
X Y


Zero Correlation or Uncorrelated:-
If no relationship between the variables then the variables are called Zero Correlation or
Uncorrelated.
Simple & Multiple Correlation:-
Studying only two variables is called Simple Correlation.
Studying more than two variables is called Multiple Correlation.
Partial & Total Correlation:-
Studying two variables excluding some other variables is called Partial Correlation.
Studying all variables is called Total Correlation.
Linear and Non-linear Correlation:-
If the ration change between two variables is uniform then there will be linear Correlation.
The one variable does not bear a constant ration of the amount of change of other variable is called
Non-Linear Correlation.
Methods of Correlation:-
Graphical Method
o Scatter diagram or scatter gram
o Simple Graph
Mathematical Method
o Karl Pearson Coefficient of Correlation.
o Spearmans Rank Correlation Coefficient.
o Method of Concurrent Deviation.
o Method of Least Squares.
GRAPHICAL METHOD
Scatter Diagram:-
In a Graphical Method,
We take x-values on x-axis, y-values on y-axis. We plot each Y value against X.
If the plotted points move from bottom left hand corner to top right hand corner then we say there
is Positive Correlation.
If the plotted points move from top left hand corner to bottom right hand corner then we say there
is Negative Correlation.
If the plotted points are scattered around the graph then we say there is Zero Correlation.
USES:-
It is simple and easy to understand.
To find out nature of correlation.
Simple Graph:-
The values of two variables are plotted on a graph paper we get two curves. These two curves reveal
directions and closedness of the two variables.
If two curves move in same direction (Both are parallel to each other, upward or backward) then
the correlation is Positive Correlation.
If two curves move in opposite direction then the correlation is Negative Correlation.
USES:-
It is used in Time Series analysis.
MATHEMATICAL METHOD
Karl Pearson Coefficient of Correlation:-
This definition was given by great British Bio metrician and Statistician Karl Pearson. For this it
is called as Karl Pearson Correlation Coefficient. It is also called as Product Moment Correlation
Coefficient. And denoted by r, defined as
=
( , )
( ). ( )
=
( , )
.
Note:-
The correlation coefficient is also defined as
I. =
( )( )
( ) . ( )
II. =

.
Where = =
PROPERTIES:-
1. The Correlation Coefficient is always lies between -1 and +1.
i.e., -1 r +1
If r=0 then the variables are Zero Correlated.
If r>0 then the variables are Positively Correlated.
If r<0 then the variables are Negatively Correlated.
If r=+1 then the variables are Perfect Positive Correlated.
If r=-1 then the variables are Perfect Negative Correlated.
2. If x and y are independent variables then cov(x,y)=0
i.e., Correlation coefficient r=0
3. Correlation Coefficient is change of origin and scale terms.
=

, =

Where a, b are Origin Terms and h, k are Scale Terms
4. If x and y are random variables, a, b, c, d are numbers then
( + , + ) =
| |
( , )
SPEARMANS RANK CORRELATION COEFFICIENT:-
The Spearmans Rank Correlation denoted by and defined as
= 1

( 1)
Where,
Is Spearmans Rank Correlation Coefficient.
.
n Number of observations.
WHEN RANKS ARE REPEATED:-
= 1

( ) ( ) ( )
..
( )
Where,
m = Number of ranks are repeated.
The Spearmans Rank Correlation Coefficient is always lies between -1 & +1
i.e., -1 +1.
REGRESSION ANALYSIS
Regression:-
To estimate the unknown value of one variable from the known value of the related variable is called
Regression.
Lines of Regression:-
The average relationship between two variables is called Line of Regression or Estimating Line.
Uses:-
It is used to find value of one variable when the value of other variable is given.
i.e., Finding Y value when X is given
Finding X value when Y is given
It is used to estimate the relation between two economic variables like Income and Expenditure.
It is highly valuable tool in Economics and Business.
It is widely used for prediction purpose.
We can calculate coefficient of correlation with the help regression coefficient.
It is useful in statistical estimation of demand curves, supply curves, production function, lost function and
consumption function etc.
Difference between Correlation and Regression:-
CORRELATION REGRESSION
In Correlation the variables are x and y are
Random variables.
In Regression the variable x is random variable and y is fixed
variable.
The correlation coefficient is a measure between
two or more variables.
The Regression establishes a functional relationship between
dependent and independent variables.
The coefficient of correlation is a relative measures. Regression coefficient is an absolute figure.
Correlation studies linear relationship between
variables.
Regression studies Linear and Non-linear relationship between the
variables.
REGRESSION LINES:-
There are two types of Regression lines namely,
Regression line Y on X
Regression line X on Y
Regression Line Y On X:-
The Regression line Y on X is
= . ( )
Where,
=

, =

=

( ) , =

( )
=
.
.
=

2
.
2
= . is called Regression coefficient.
Regression Line X On Y:-
The Regression line X on Y is
= . ( )
= . is called Regression coefficient.
PROPERTIES:-
1. Correlation Coefficient is a Geometric Mean of Regression Coefficient.
i.e. = .
2. Arithmetic Mean of Regression Coefficient is greater than Correlation Coefficient.
i.e. >
3. If one regression coefficient is greater than unity then the other regression coefficient is less than unity.
i.e., > 1 < 1 and > 1 < 1
4. Both the regression coefficient should have the same sign.
i. If is positive then is also positive.
ii. If is negative then is also negative.
5. If be the angle between two regression lines then
= tan
1
.
.
+
If r = 0 then = and r = 1 then = 0