Correlation Analysis

Types of Relations:
1.Positive / Negative / Zero
2. Linear / Non Linear
3. Simple / Multiple / Partial
Methods of measures of
Relationships:
1. Scatter Diagram
2. Karl. Pearsons coefficient of
Correlation
3. Rank Correlation
Ex: Chattisgarh become a new state in
2000. the property prices in the state
capital, Raipur, are zooming up. The real
estate business has an edge over other
business streams. Bhilai, an important
industrial town of Chattisgarh is also
experiencing the same phenomenon. The
following table shows the escalation of
property prices (average price in major
locations) in Raipur and Bhilai in the past 7
years in different quarters. Establish
relationship between the variables by
constructing scatter plot.
Year Quarter
Price per sqft
in Raipur
Price per sqft in
Bhilai
2001 1 1000 600
2001 2 1250 670
2001 3 1400 610
2001 4 1350 870
2002 1 1750 930
2002 2 1850 1030
2002 3 1700 1000
2002 4 2100 1300
2003 1 2300 1250
2003 2 2390 1200
2003 3 2350 1540
2003 4 2570 1700
2004 1 2700 1650
2004 2 2650 1880
2004 3 3100 1800
2004 4 3250 2150
2005 1 3200 2100
2005 2 3650 2280
2005 3 3560 2400
2005 4 3880 2300
2006 1 4200 2800
2006 2 4150 2700
2006 3 4660 3150
2006 4 4500 3050
2007 1 4970 3300
2007 2 4900 3250
2007 3 5180 3750
2007 4 5300 3900
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000
Karl .Pearsons Coefficient of Correlations is given by,
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Ex: Pepsi Cola is studying the effect of
its last advertising campaign. People
chosen at random were called and
asked how many cans of Pepsi Cola
had bought (X) in the past week and
how many advertisements (Y) they
had either read or seen in the past
week.
X :3 7 4 2 0 4 1 2
Y :11 18 9 4 7 6 3 8
Calculate the coefficient of Correlation
and coefficient of determination.
The HR manager of a multinational
company wants to determine the
relationship between experience and
income of employees. The following data
are collected from 14 randomly selected
employees.
Experience 2 4 5 6 7 8 9 10 12 13 14 15 16 18
Income 30 40 45 35 50 60 70 65 60 55 75 80 85 75
A real estate developer of single family dwelling
across the country is in the process of
developing plans for the next several years.
An analyst for the company believes that
interest rates are likely to increase but remain
at low levels. To help make decisions about
the number of homes build, the developer
acquired the monthly bank prime rate and the
number of new single family homes sold (in
000s) from 2000 to 2007. Calculate the
coefficient of correlation and determination.
Year Rate Houses
2000 9.23 73
2001 6.92 76
2002 4.68 81
2003 4.12 91
2004 4.34 100
2005 6.19 107
2006 7.96 88
2007 8.25 73
The monthly rate of return for Research in
Motion (makers of the Blackberry) and the
NASDAQ index (a measure of the overall
NASDAQ stock market) were recorded for
each month between Jan 2001 and Dec
2006. Calculate the relationship between
the variables rate of return and NASDAQ
index.
Data file
One way of measuring the extent of
unemployment is through the help wanted
index, which measures the number of
want ads in the nations news papers. The
higher the index, the greater is the
demand for workers. Another measure is
the unemployment rate among insured
workers. An economist wanted to know
whether these two variables are
related, and if so how. He acquired the
help wanted index and unemployment
rates over the past few years. Determine
the strength and direction of the
relationship.
Unemployment r te Help wanted index
3.28 42
3.03 44
2.93 42
5.59 27
4.37 38
4.13 44
4.3 38
6.84 27
Spearman's Rank Correlation is given by
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ns observatio of pair of no. is
R R d Where
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Ten Competitors in a beauty contest are

ranked by three judges in the following
order.
Judge I :1 6 5 10 3 2 4 9 7 8
Judge II :3 5 8 4 7 10 2 1 6 9
Judge III:6 4 9 8 1 2 3 10 5 7
Determine which pair of judges has the
nearest approach to common tastes in
beauty.
An economist wanted to find out if there was any
relationship between the unemployment rate in a
country and its inflation rate . Data gathered
from 7 countries for the year 2004 are given
below.
Country Unemployment Inflation rate
rate (%) (%)
A 4.0 3.2
B 8.5 8.2
C 5.5 9.4
D 0.8 5.1
E 7.3 10.1
F 5.8 7.8
G 2.1 4.7
Find the degree of linear association between a
countrys unemployment and its level of inflation.
When ranks are equal we add correction factor
to d
2
and is given by
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repeated item an times of number is m ,
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is factor correction Where
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factor correction 6
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A financial analyst wanted to find out whether inventory
turnover influences any companys earnings per share
(in %).A random sample of 7 companies listed in a stock
exchange were selected and the following data was
obtained for each.
Company Inventory turnover Earnings per
(No.of times) share(%)
A 4 11
B 5 9
C 7 13
D 8 7
E 6 13
F 3 8
G 5 8
Find the strength of association between inventory
turnover and earnings per share. Interpret the result.
Co efficient of Determination:
The Squared value of Coefficient of Correlation
is called Co efficient of determination.
It indicates the proportion of the total variability
of dependent variable that is accounted for or
explained by the independent variable.
It always lies between 0 and 1.
The following table gives indices of industrial
production and number of registered unemployed
people (in lakh). Calculate the value of the
correlation coefficient.
Year 1991 1992 1993 1994 1995 1996 1997 1998
Index of production 100 102 104 107 105 112 103 99
No.of Unemployed 15 12 13 11 12 12 19 26