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Correlation

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Correlation as the word indicates means interrelationship and in statistical term is used to signify the

extent of relationship between two variables and therefore,

Correlation measures the Strength of relationship between

two variables.

There are two types of correlation: Positive

Correlation, Negative Correlation (or) No Correlation.

Positive Correlation: When there is a strong relationship

between two different variables such that both behave

similarly and are dependent variables, and show a positive

linear relationship.

Lets discuss this with an example to understand it better. We

have learnt in school that as Temperature increases, Pressure

also increases.

observe that if we plot a linear line through the data points it

will look somewhat like the graph displayed in the

below Figure (a). Here, both the variables move in the same

direction. Therefore, it is called a Positive Correlation.

Negative Correlation: When there is a relationship between

two variables such that an increase in one variable results

in a decrease in its dependent variable, it indicates a

negative correlation.

For example, when hours of time spent watching Television by

a student increases, his marks in examination decreases.

In this example, as hours of time spent watching TV

increases, the students marks decreases. So, both the

variables move in opposite direction. Therefore it is called

as Negative Correlation. This is depicted in the

below Figure (b).

axis, there will be a paired value in Y axis.

A Scatter Plot cannot be drawn without paired data

values.

In Figure (a), the graph represents the Correlation between

Temperature and Pressure. The line moving upwards

indicates Positive Correlation. The second graph [Figure (b)],

represents the Correlation between Hours spent watching TV

and Marks in Exam. The line moving downwards indicates

negative Correlation.

understand the concept of Correlation completely it is

theStrength of Correlation.

When two variables are correlated, how to predict the strength

of the Correlation? Are they highly correlated?, or are they

weakly correlated?, or is there NO Correlation between these

two variables?

The Strength of Correlation is calculated using the below

Formula.

r : Correlation coefficient

n: Number of data sets

xi :ith Value of variable x

yi :ith value of variable y

coefficient.

Note: One of the pre-requisites for using this Pearsons

Correlation coefficient is that both the variables should be in

Continuous Scale.

Another pre-requisite is that Pearsons Correlation coefficient

applies only for linear relationships.

Mathematically, the value of Coefficient of Correlation can

range from -1 to +1. While -1 signifies perfect negative

Correlation, +1 signifies perfect positive Correlation. But in

real life, such a scenario is very rare.

Correlation coefficient takes values like 0.9, 0.8, 0.75,-0.8,0.9, -0.75 etc. Positive values in the series indicate Strongly

Positive Correlation and negative values indicate Strongly

Negative Correlation.

The scatter plot of the above scenario will look like this.

0.25, -0.25, -0.3, -0.4 etc. Positive values in the series

indicate Weakly Positive Correlation and negative values

indicate Weakly Negative Correlation.

Below is the Scatter Plot that illustrates this. We can see how

closely the data points are lying near the linear line (trend

line can be used in excel) for data that are strongly correlated

(positive or negative) as compared to the weakly correlated

data points.

What will happen when two variables are not correlated at all?

They will behave randomly, and the plot will look something

like the graph below. The r value will be 0 when the variables

are not correlated.

of them here.

1.

are correlated. Based on the historical values of X and Y,

Y values for future can be predicted.

2.

In the field of medical research, researchers might

want to know if a particular medical condition is related to

intake/use of a particular medicine.

3.

In stock market, to understand how the rise and fall

of share prices are related to changes in a particular

economic parameter (say $ conversion rate/ FOREX rate

etc.).

4.

Sigma, to assess the behavior of a particular metric and

the influencing parameters, that cause the variation.

There are many such uses for Correlational Analysis. Users

should remember an important point while performing

Correlation Analysis.

Causation

Correlation of X and Y variable does not mean that the

variation in Y is caused by (or) due to a variation in X. It is

just that they happen simultaneously. It is with the business

knowledge, that the user should decide whether the

relationship is causation or not.

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