MODULE OF INSTRUCTION

Module 8
Correlation and Regression Analysis

Welcome to the eighth module of Business Statistics!

In this part, you shall now know how the degree of relationship
between the variables.

After reading this chapter, you should be able to

 Understand Correlation Analysis

 Understand Regression Analysis

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7.1 Correlation Analysis

Correlation analysis is a method used to measure the strength of
relationship between the variables.

Correlation may either be positive, negative or zero. A positive

correlation exists when high scores in one variable are associated with
high score in the second variable. A negative correlation exists when
high scores in one variable are associated with low scores of the other
variable, vice versa. A zero correlation happens when scores of one
variable tend to be neither systematically high nor systematically low
in the other variable.

7.1.1 Pearson Product-moment Correlation Coefficient

One usually and roughly estimate if a relationship exists between

variables by constructing a scatter diagram, however this just gives us
very little information. Fortunately, we have a simple tool which can
help us tell the degree of relationship between variables, this is the
correlation coefficient.

Table 1. The Correlation Scale

Correlation Coefficient Interpretation
0 No correlation
±0.01 to ± 0.20 Negligible relationship
±0.21 to ± 0.40 Low correlation
±0.41 to ± 0.70 Substantial relationship
±0.71 to ± 0.99 High correlation
±1 Perfect Correlation

The most popular and widely used correlation coefficient is the

Pearson product-moment correlation coefficient or simply Pearson r.

Formula

n(∑XY)−(∑X)(∑Y)
r=
√[n∑X2 −(∑X)2 ][n∑Y2 −(∑Y)2 ]

where n number of paired observations

X the first variable
Y the second variable

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7.2 Regression Analysis

If two variables are correlated, it is possible to predict and estimate the
value of one variable from the knowledge of the other variable. The
estimation of one variable based on the changes or movements of the
other variable is called the regression analysis.
The estimation of relationship is given by the linear equation called the
Method of Least Squares. The general formula is Y = a + bX

The constant a and b can be computed using the following formulas

(∑Y)(∑X2 )−(∑X)(∑XY)
a= n∑X2 −(∑X)2

𝑛(∑XY)−(∑X)(∑Y)
b= n∑X2 −(∑X)2

where n number of paired observations

X the first variable
Y the second variable

Example

A personnel manager would like to know if there is a relationship

between the knowledge factors and pratical factors of a training
course. The following were obtained from six trainees on the
knowledge factors (X) and the practical factors (Y).

Trainee X Y
1 2 4
2 4 10
3 4 8
4 5 8
5 7 14
6 8 16

After finding the relationship, find the general regression equation.

Excel Sheet Application

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 Business Statistics

Glossary
Correlation - the strength of relationship between two or more variables

Regression - a functional relationship between two or more correlated

variables

References
Weiers, R. (2008). Business Statistics, Sixth Edition. Natorp
Boulevard; Thomson South-Western.

http://www.excelfunctions.net/

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