COEFFICIENT OF CORRELATION

Objectives:
1. Compute the coefficient of correlation of bivariate data
2. Determine the degree of association between bivariate data.
THE PEARSON PRODUCT MOMENT COEFFICIENT OF CORRELATION, r
- Is an index of relationship between two variables. The independent variable
can be represented by x while the dependent variable can also be
represented by y. The value of r is +1, zero to -1, if the value of r is +1 or -1,
there is a perfect correlation between x and y. It can be said that x
influences y or y depends on x. However, if r equals zero then x and y are
independent of each other.
- Is used to measure the linear relationship between two variables that are
normally distributed. It is denoted by r.
To find the Pearson Product Moment correlation coefficient, we do the following:
1. Given the data in tabular form, add three columns to find XY, X 2, and Y2.
2. Find the values of the following:
∑ X, ∑Y, ∑XY, ∑X2, ∑Y2
3. Find the coefficient of correlation® using the formula
 In preparation for the coming board meeting, the management of RMR
Fashion collected the monthly advertising expenses and sales for the past
12 months.

Advertising Sales
Expenses
(in ten XY X2 Y2
(in ten thousands)
thousands)
15 21 315 225 441
18 27 486 324 729
20 20 400 400 400
24 28 672 576 784
16 17 272 256 289
26 31 806 676 961
10 7 70 100 49
16 14 224 256 196
11 14 154 121 196
38 34 1292 1444 1156
36 39 1404 1296 1521
32 31 992 1024 961
Total - 262 283 7087 6698 7683
From the table we can get the following:
∑ X = 262, ∑Y = 283, ∑XY = 7087, ∑X2 = 6698, ∑Y2 = 7683
Substituting to the formula
r = 12(1807) – (262)(283)
√ [12(6698)-(262)2] [12(7683)-(283)2
r = 0.9144

To interpret the value of correlation coefficient, we can use the table below:
Value of r Interpretation
1.0 Perfect positive correlation
0.90 to 0.99 Very high positive correlation
0.70 to 0.89 High positive correlation
0.40 to 0.69 Moderate positive correlation
0.20 to 0.39 Small positive correlation
-0.20 to 0.19 Very small, Negligible
-0.40 to -0.21 Small negative correlation
-0.70 to -0.41 Moderate Negative Correlation
-0.90 to -0.71 High Negative Correlation
-0.99 to -0.91 Very High Negative Correlation
-1.0 Perfect Negative Correlation
Since r = 0.9144, we can say that there is very high positive correlation between
the advertising expenses and sales of the company.
To test the significance of the value of Pearson’s correlation coefficient, the
student’s t-test should be computed using the formula.
t = r√N–2
 √ 1 – r2
Where t = t -test
r = Pearson’s Product moment correlation coefficient
N = number of paired samples
Let us illustrate by testing whether or not the correlation between advertising expenses and
sales is significant at 5% of significance.
At df = 10, the critical value of t is + 2.228. Since [t computed value] > [tabular value], we can
say that the correlation between advertising expenses and sales is significant.

Considering the following rules for making decision based on computed t value,
1. If the absolute computed t value is greater than or equal to the absolute
tabular value [t computed value] > [tabular value], reject Ho. It means that
there is significant correlation between the two variables.
2. If the absolute computed t value is less than the absolute tabular value
[t computed value] < [tabular value], do not reject Ho. It means that there
is no significant correlation between the two variables.

SPEARMAN’S RANK CORRELATION COEFFICIENT

- Measures the linear relationship between two variables using ranks.
To find the Spearman’s Rank correlation coefficient, we do the following:
1. Rank separately the values in each variable.
2. Determine the difference between the two sets of ranks and square
each difference (D).