.Content • • • • • What is correlation? Importance of correlation Types of correlation Methods to measure correlation Formula for Karl Pearson’s Coefficient of Correlation • Real life problem and solution.

. whether there exists any relationship between 2 or more variables.What is Correlation? • Correlation is a statistical tool which is used to find. • It was developed by Sir Francis Galton in 1888 and Karl Pearson in 1896.

• The measure of coefficient of correlation is relative measure of change. .Importance of Correlation • Prediction of one variable . • The effect of correlation is to reduce the range of uncertainity of our prediction.

Eg: y=f(x. keeping the other independent variables constant. when all the variables change simultaneously. Eg: y=f(x) • Multiple: there exists more than 1 independent variable. .z) • Partial: finding the change in the dependent variable for a change in one independent variable. • Simple: there is only 1 independent variable. • Negative: “x” & “y” move in opposite directions. • Total: finding the change in dependent variable.Types of Correlation Positive & Negative correlation: Simple & Multiple correlation: Partial & Total correlation: • Positive: “x” & “y” move in the same direction.

regression.e. i.• There are various methods to measure correlation: – Scatter diagram Methods to measure correlation – Karl Pearson’s correlation coefficient – Spearman’s Rank correlation coefficient – Method of least squares. .

Value of r (a) If r = +1 (b) If r =-1 (c) If r =0 interpretation Perfect positive correlation Perfect negative correlation No correlation .Formula for Karl Pearson’s Coefficient of Correlation Where. The value of “r” lies between +1 & -1. r = coefficient of correlation .

a second.year MBA student. is doing a study of companies going public for the first time. He is curious to see whether there is a significant relationship between the size of the offerings and the price per share. .REAL LIFE PROBLEM • Dave Proffitt.

50 3.40 7.60 39.50 5.00 19.00 12.50 375.00 .00 6.00 51.00 66.00 6.00 10.00 5.00 8.00 12.00 4.50 3.00 PRICE PER SHARE($) 12.40 4.00 68.00 4.SIZE OF OFFERINGS ($ millions) 108.50 5.40 3.00 12.00 6.00 13.00 15.

This value is near +1.584”.• Calculated table • Calculations: • RESULT: The coefficient of correlation comes out to be “0. that there is a positive correlation between the size of the offerings and the price per share. so we can say. .

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