CONCEPT AND DEFINITION OF

CORRELATION
• In many practical applications, we might come across
the situation where observations are available on
two or more variables. The following examples will
illustrate the situations clearly:
• 1. Heights and weights of persons of a certain group;
• 2. Sales revenue and advertising expenditure in
business; and
• 3. Time spent on study and marks obtained by
students in exam.
 TYPES OF CORRELATION
• 1. Positive Correlation
• Correlation between two variables is said to be positive if the
values of the variables deviate in the same direction i.e. if the
values of one variable increase (or decrease) then the values of
other variable also increase (or decrease). Eg House hold
income and expenditure
• 2. Negative Correlation
• Correlation between two variables is said to be negative if the
values of variables deviate in opposite direction i.e. if the values
of one variable increase (or decrease) then the values of other
variable decrease (or increase). Eg. Price and demand of goods
 Scatterplot
• When we collect measures on two variables for the
purpose of examining the relationship between
these variables, one of the most useful techniques
for gaining insight into this relationship is a
scatterplot (also called a scatter diagram).
• Scatter diagram is a statistical tool for determining
the potentiality of correlation between dependent
variable and independent variable
• In a scatterplot, the predictor variable is
traditionally represented on the abscissa, or X-
axis, and the criterion variable on the
ordinate, or Y-axis.
 Interpretation from Scatter Diagram

• If dots are in the shape of a line and line rises

from left bottom to the right top, then
correlation is said to be perfect positive.
• If dots in the scatter diagram are in the shape of a
line and line moves from
• left top to right bottom then correlation is perfect
negative
• If dots show some trend and trend is upward
rising from left bottom to right top correlation
is positive
• If dots show some trend and trend is downward from
left top to the right
• bottom correlation is said to be negative.
• If dots of scatter diagram do not show any
trend there is no correlation between the
variables
 COEFFICIENT OF CORRELATION
• Scatter diagram tells us whether variables are
correlated or not. But it does not indicate the
extent of which they are correlated.
Coefficient of correlation gives the exact idea
of the extent of which they are correlated.
Assumptions for Correlation Coefficient
• 1. Assumption of Linearity
• Variables being used to know correlation coefficient must be linearly
related. You can see the linearity of the variables through scatter
diagram.
• 2. Assumption of Normality
• Both variables under study should follow Normal distribution. They
should not be skewed in either the positive or the negative direction.
• 3. Assumption of Cause and Effect Relationship
• There should be cause and effect relationship between both variables,
for example, Heights and Weights of children, Demand and Supply of
goods, etc. When there is no cause and effect relationship between
variables then correlation coefficient should be zero. If it is non zero
then correlation is termed as chance correlation or spurious correlation
 Correlation and Regression
• Both correlation and regression have important role in relationship study
but there are some distinctions between them which can be described as
follow:
• (i) Correlation studies the linear relationship between two variables while
regression analysis is a mathematical measure of the average relationship
between two or more variables.
• (ii) Correlation has limited application because it gives the strength of
linear relationship while the purpose of regression is to "predict" the
value of the dependent variable for the given values of one or more
independent variables.
• (iii) Correlation makes no distinction between independent and
dependent variables while linear regression does it, i.e. correlation does
not consider the concept of dependent and independent variables while
in regression analysis one variable is considered as dependent variable
and other(s) is/are as independent variable(s).
 LINEAR REGRESSION
• In general sense, regression analysis means
estimation or prediction of the unknown value
of one variable from the other variable.
• For example we might be interested in
estimation of production of a crop for
particular amount of rainfall or in prediction of
demand on the price or prediction of marks
on the basis of study hours of students.
• If two variables are correlated significantly,
then it is possible to predict or estimate the
values of one variable from the other.
• Regression analysis describes how the
independent variable(s) is (are) related to the
dependent variable i.e. regression analysis
measures the average relationship between
independent variables and dependent variable
• There are two types of variables in regression analysis:
• 1. Independent variable
• 2. Dependent variable
• The variable which is used for prediction is called
independent variable. It is also known as regressor or
predictor or explanatory variable.
• The variable whose value is predicted by the
independent variable is called dependent variable. It is
also known as regressed or explained variable.
• Correlation
X Y
12 10
2 3
5 7
9 5
11 9
10 8
4 6
1 3