Correlation and

Regression Analysis
Correlation concept
Correlation is a statistical tool that helps to
measure and analyze the degree or extent to
which two or more variables fluctuate with
reference to one another.

Correlation denotes the interdependence

among the variables.
Definition
According to L.R. Coonnor ” If two or more
quantities vary so that movement in one
tends to be accompanied by corresponding
movement in the other, then these two
quantities are said to be correlated.”
Nature of correlation
Changes in the Changes in the Nature of
independent variable dependent variable correlation
(+) (+) (+)
(+) (-) (-)
(-) (+) (-)
(-) (-) (+)
 Types of Correlation

Positive and Negative : When

increase (decrease) in one variable
leads to increase (decrease) in the
value of the other variable.
Positive & Negative Correlation

e.g. Income & demand  +ve

Price & demand  -ve
Simple and Multiple :

In simple correlation, the relationship is

confined to only two variables whereas in
multiple it is with more than two variables.

Simple & Multiple Correlation

e.g. Demand = f (price)  simple

Demand = f (price, income, fashion, taste)
 multiple
Partial and Total :
Recognizes more than two variables in partial
correlation but the relationship is confined to only two
variables keeping the other variables constant.
Partial & Total Correlation
e.g. Demand = f (price) partial
Demand = f (price, income, fashion, taste) total
Linear and Non linear (Curvilinear) :

In linear correlation, amount of change in one

variable tends to bear a constant ratio to the
amount of change in the other variable
 Linear Correlation Curvilinear Correlation

Y
Y

X X
Methods of studying Correlation

 Scatter Diagram

 Karl Pearson’s coefficient of correlation

 Spearman’s Rank correlation coefficient

 Method of least square

 Methods of correlation

graphic
graphic algebraic
algebraic

1. Karl pearson
1. Karl pearson
2. Rank method
2. Rank method
 Scatter Diagram

Scatter diagram is a graph or chart which helps to

determine whether there is a relationship between
two variables by examining the graph of the
observed data.

A scattered diagram can give us two types of

information:
 Pattern that indicate that the variables are related.

 If the variables are related,what kind of line or

estimating equation,describes this relationship.
Advantages of Scatter Diagram

Give pictorial representation of the variables

Non Mathematical method for finding the correlation

between the variables

Degree of correlation between the two variables can

be known by observation

Not influenced by the extreme observations

Limitations

Give only rough idea about the correlation.

Following are the heights and weights of 10
students of a B.Com. class

Height (inches) 62 72 68 58 65 70 66 63 60 72
Weight (Kgs.) 50 65 63 50 54 60 61 55 54 65

Draw the scatter Diagram & comment on the Correlation

Karl Pearson’s Coefficient
of Correlation
Karl Pearson’s coefficient of
correlation

Developed by British Biometrician Karl

Pearson , it is the ratio of covariance of
between x and y

Karl Pearson’s Coefficient of Correlation

when deviations are taken from Actual
Mean
 Cov( X , Y )  xy N  xy
r (or )r   
xy     N 
x y x y x y
where
xX X and y  Y Y
2 2
   x N and    y N
x y
Value of correlatio n coefficien t lies
between  1 & 1, i.e.
 1  r  1
r  1  perfect negative correlatio n
r  0  No correlatio n
r  1  perfect positive correlatio n
Karl Pearson’s coefficient of correlation

dx  x  x
dy  y  y
 dxdy
r 
 dx 2  dy 2
Karl Pearson’s coefficient of correlation
when deviations are taken from
Assumed Mean

N  dxdy   dx  dy
r
2 2 2
N  dx    dx  N  dy    dy  2
From the following table calculate the
coefficient of Correlation by Karl
Pearson’s Method.

X 6 2 10 4 8
Y 9 11 5 8 7
X Y dx dy dx2 dy2 dxdy

6 9 0 1 0 1 1

2 11 -4 3 16 9 -12

10 5 4 -3 16 9 -12

4 8 -2 0 4 0 0

8 7 2 -1 4 1 -2

30 40 0 0 40 20 -26
  x  y
x   6, y   8
n n
dx  x  x , dy  y  y
 dxdy
r 
 dx  dy
2 2

 26
r    0 . 92
40 * 20
Calculate the coefficient of Correlation by Karl
Pearson’s Method between expenditure on
advertising and sales from the data given.

Advertising Expenses 3 6 62 9 8 75 2 9 3 7
(‘000 Rs.) 9 5 0 2 5 8 6 8
Sales (lakh Rs.) 4 5 58 8 6 68 6 9 5 8
7 3 6 2 0 1 1 4