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CORRELATION

• A Statistical technique that is used to analyse the strength and direction of the relationship between two quantitative variable is called Correlational analysis. • Two variables are said to be in correlation if the change in one of the variable results in a change in other variable. E g :- 1) Frequency of smoking and lungs damage , 2) Sales revenue and expenses incurred on advertising.

Importance of correlation

• If variables are linearly related to each other then it helps in estimation of one from the other.

– Advertisement and sales – Prices and Demand

• We use Regression Analysis to find the value of one variable from the other

TYPES OF CORRELATION • POSITIVE AND NEGATIVE • LINEAR AND NON-LINEAR • SIMPLE .PARTIAL AND MULTIPLE .

• If both variables vary in the opposite direction. – If one variable increases and the other decreases.POSITIVE CORRELATION AND NEGATIVE CORRELATION POSITIVE CORRELATION NEGATIVE CORRELATION • If the variables vary in same direction. the other also decreases. the other also increases on the other hand. – If one variable increases. or one decreases the other increases. . if one variable decreases. correlation is said to be POSITIVE. correlation is said to be NEGATIVE.

• If the extent of change in one variable tends to have no consistent ratio in the extent of change in another variable.LINEAR CORRELATION NONLINEAR CORRELATION LINEAR CORRELATION NON-LINEAR CORRELATION • If the extent of change in one variable tends to have a constant ratio in the extent of change in another variable. . then the correlation is said to be LINEAR. then the correlation is said to be NON-LINEAR.

it is simple correlation • When three or more than three variables are involved.PARTIAL AND MULTIPLE CORRELATION • When only two variables are involved. we can compute either partial or multiple correlation .SIMPLE.

Methods of correlation graphic algebraic 1. Rank method . Karl pearson Scatter diagram 2.

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.what kind of line or estimating equation. • If the variables are related. A scattered diagram can give us two types of information: • Pattern that indicate that the variables are related. .describes this relationship.

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r= N Σdxdy .KARL’S PEARSONS COEFFIENT OF CORRELATION • Karl Pearson’s Coefficient of Correlation denoted by.Σdx Σdy √N Σdx²-(Σdx)²√N Σdy²-(Σdy)² .‘r’ The coefficient of correlation ‘r’ measure the degree of linear relationship between two variables say x & y.

then there exists no correlation between the variables . then the correlation between the two variables is said to be perfect and negative If r = 0.Interpretation of Correlation Coefficient (r) The value of correlation coefficient ‘r’ ranges from -1 to +1 If r = +1. then the correlation between the two variables is said to be perfect and positive If r = -1.

eg :.REGRESSION • The statistical technique that express the relationship between two or more variables in the form of an equation to estimate the value of a variable. based on the given value of another variable is called regression analysis.Profit after Sales of a firm. .

Difference between dependent variable and independent variable Dependent Variable 1. . The known variable is called the independent variable. 5. The variable we are trying to predict is the dependent variable. 4. An output variable. Variable that is controlled or manipulated. 3. 4. Variable that cannot be controlled or manipulated. Independent Variable 1. 2. An input variable. It is plotted on horizontal axis. It is plotted on vertical axis. What we typically call ”Y”. 2. 3. What we typically call “X”. 5.

Correlation • A statistical method used to determine whether a relationship between two or more variables exist.Difference between Regression and Correlation Regression • A statistical method used to describe the nature of relationship. • In correlation analysis we examine the degree of association between two variables • In linear regression analysis one variable is considered as dependent variable and other as independent variable .

• It helps to determine standard error of estimate to measure the variability or spread of values of a dependent variable with respect to the regression line.Advantages of Regression Analysis • It helps in developing a regression equation by which the value of a dependent variable can be estimated given a value of an independent variable. .

Estimation using the Regression Line • The equation for a straight line where the dependent variable Y is determined by the independent variable X is: Y = a + bx Where. a = y-intercept b = slope of the line Y = value of dependent variable X = value of independent variable .

THE METHOD OF LEAST SQUARE • It is a method of having a “good fit” of a line which minimizes the error between the estimated points on the line and actual points that were used to draw it. • The Estimated Line is: = a + bx . • In this method Y represents the individual value of the observed points measured along the Y-axis and Y(y-hat) symbolize the individual values of the estimated points.

nx y ∑X2 –n x2 a = y -bx Where.b = ∑XY . a = Y-intercept b = slope of the best-fitting estimating line. X = value of independent variable Y = value of dependent variable x = mean of the values of the independent variable y = mean of the values of the dependent variable .

) 2 ∑(Y-Y̅ ) 2 2 . r = 1.∑(Y.COEFFICIENT OF DETERMINATION • The convenient way of interpreting the value of correlation coefficient is to use of square of coefficient of correlation which is called Coefficient of Determination. • The Coefficient of Determination is r2.

)2 n-2 If Se=0. It is given by: S = ∑(Y. e . the estimating equation is expected to be a “perfect” estimator of the dependent variable.STANDARD ERROR OF ESTIMATE Standard error of estimate measures the variability of the scatter of the observed values around the regression line.

WHAT DOES TIME-SERIES MEAN? • A time series is a sequence of data points. measured typically at successive points in time spaced at uniform time intervals. • Time series is a set of measurements of a variable that are ordered through time • Time series analysis comprises methods for analyzing time series data in order to extract meaningful statistics and other characteristics of the data .

DIFFERENCE WITH REGRESSION ANALYSIS • Time –series Analysis Time series forecasting is the use of a model to predict future values based on previously observed values. • Regression Analysis Regression analysis is often employed in such a way as to test theories that the current value of one time series affects the current value of another time series. . Regression analysis cannot explain seasonal and cyclical effects. It shows or suggests periodicity of a data like seasonal and cyclical effects.

COMPONENTS OF TIME SERIES • • • • SECULAR TREND CYCLICAL VARIATIONS SEASONAL VARIATIONS IRREGULAR VARIATIONS .

SECULAR TREND . so. Secular Trend is affected by prices. We find that over the last few years the sales of Laptop in Ranchi has increased. productions and sales of the commodity as well as the population of the area. we can say that the sales of Laptop is showing an “ Upward Trend”. Examples1. If we talk about commodities.A time-series which displays a steady tendency of either upward or downward movement in the average (or mean) value of the forecast variable (let us say ‘y’) over a long period of time is called “Trend”. 2. This shows the “Declining Trend” of using Landline Phone. Use of Landline Phone has decreased over the last few years.

Upward trend of sales of Laptops in Ranchi Units 10000 8000 6000 4000 2000 2000 2001 2002 2003 2004 2005 2006 2007 years .

Declining trend of using Landline Phones in India units (in ‘000) 180 150 120 90 60 30 2000 01 02 03 04 05 06 07 08 09 10 11 years .

Business Cycle. Timing is the most important factor which affect the Cyclical Variations. it consists of the recurrence of the up and down movements of business activity .CYCLICAL VARIATION Cyclical variations are long-term movements that represent consistently recurring rises and declines in activity. for example.

prosperity Economic activities Prosperity or boom depression time Cyclical Variation(Business cycle) .

festivals and habits. Since these variations repeat during a period of twelve months so.SEASONAL VARIATION Seasonal variations are those periodic movements in business activity which occur regularly every year. they can be predicted fairly accurately. customs. for example-Sales of Cold-drinks goes up in summer season than any other season . Seasonal Variations are caused by climate and weather conditions.

Sales of Cold-drinks Units 20000 18000 16000 14000 12000 10000 2000 2001 2002 2003 2004 2005 2006 years .

). For example-Production of cars tremendously went down after earthquake came in Japan in Nov 2011.IRREGULAR VARIATION Irregular variations refer to such variations in business activity which do not repeat in a definite pattern. . floods. wars etc. Irregular Variations are caused by unpredictable factors like natural disasters (earthquakes. In these type of variations the pattern of the variable is unpredictable.These are unpredictable and no one has control over it.

Production of cars in Japan units 350000 300000 250000 200000 150000 100000 2005 2006 2007 2008 2009 2010 2011 years .

Different time-series can be compared and important conclusions can be drawn from this with the help of this we can take decisions .NEED OF TIME-SERIES ANALYSIS Helpful in evaluating current accomplishments Actual performances can be compared with the expected performance and the cause of the variations analysed Facilitates comparison.

Thank you… .

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