CORRELATION

ANALYSIS;
CORRELATIONS:
PEARSON PRODUCT
MOMENT
CORRELATION AND
SPEARMAN RANK-
ORDER
CORRELATION
RAYMAR D. TEODORO, CPA

ARCH. RENATO V. SANTOS

DR. LUISITO ORMA, PhD
WHAT IS CORRELATION?
It is a measure of an association between variables. Most
often, the term correlation is used in the context of a linear
relationship between 2 continuous variables. It measures and
describes the strength and direction of the relationship
between two variables.

WHAT IS CORRELATION
COEFFICIENT?
Methods of correlation that summarize the relationship
between two variables in a single number called the correlation
RAYMAR D. TEODORO, CPA
coefficient. It is usually given the symbol “r” and it ranges
DR. LUISITO ORMA
from -1 to 1.
DIRECTION OF A
The correlation measure tells us about the direction of the
RELATIONSHIP
relationship between the two variables. The direction can be
positive or negative.

POSITIVE CORRELATION
In a positive relationship both variables tend to move in the
same direction: If one variable increases, the other tends to
also increase. If one decreases, the other tends to also.
Example
The more time you spend running on a treadmill, the more
calories you will burn.
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
DIRECTION OF A
The correlation measure tells us about the direction of the
RELATIONSHIP
relationship between the two variables. The direction can be
positive or negative.

NEGATIVE CORRELATION
In a negative relationship the variables tend to move in the
opposite directions: If one variable increases, the other tends
to decrease, and vice-versa.
Example
If a train increases speed, the length of time to get to the final
point
RAYMAR decreases.
D. TEODORO, CPA
DR. LUISITO ORMA
DIRECTION OF A
The correlation measure tells us about the direction of the
RELATIONSHIP
relationship between the two variables. The direction can be
positive or negative.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
DEGREE (STRENGTH) OF A
RELATIONSHIP
A correlation coefficient measures the degree (strength) of the
relationship between two variables. It measures the strength
of the linear relationship between two variables.

PERFECT RELATIONSHIP
When two variables are exactly (linearly) related the
correlation coefficient is either +1.00 or -1.00. They are said to
be perfectly linearly related, either positively or negatively.
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
DEGREE (STRENGTH) OF A
RELATIONSHIP
A correlation coefficient measures the degree (strength) of the
relationship between two variables. It measures the strength
of the linear relationship between two variables.

NO RELATIONSHIP
When two variables have no relationship at all, their
correlation is 0.00.
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
FORM (SHAPE) OF A
RELATIONSHIP
The form or shape of a relationship refers to whether the
relationship is straight or curved.

Linear: A straight relationship is called linear, because it

approximates a straight line.

A curved relationship is called curvilinear, because it

approximates a curved line.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
FORM (SHAPE) OF A
RELATIONSHIP
The form or shape of a relationship refers to whether the
relationship is straight or curved.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
WHY DO WE USE CORRELATION?
1. PREDICTION
If two variables have been known in the past to correlate, then
we can assume they will continue to correlate in the future. We can
use the value of one variable that is known now to predict the value
that the other variable will take on in the future.

2. VALIDITY
Suppose we have developed a new test of intelligence. We can
determine if it is really measuring intelligence by correlating the new
test's scores with, for example, the scores that the same people get on
standardized
RAYMAR D. TEODORO,IQ
CPA tests, or their scores on problem solving ability
DR. tests,
LUISITOor their performance on learning tasks, etc.
ORMA
WHY DO WE USE CORRELATION?
3. RELIABILITY
Correlations can be used to determine the reliability of some
measurement process. For example, we could administer our new IQ
test on two different occasions to the same group of people and see
what the correlation is.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
TYPES OF CORRELATION
In statistics, we measure four types of correlations:

• Pearson correlation

• Spearman-rank correlation

• Kendall rank correlation

• Point-Biserial correlation.
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
PEARSON PRODUCT MOMENT
CORRELATION COEFFICIENT
Or simply “Pearson r” is the most widely used correlation
statistic to measure the degree of the relationship between
linearly related variables. It is a simple way to assess he
association between two variables; whether they share variance
(covary), if the relationship is positive or negative, and the
degree to which they correlate.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
PEARSON PRODUCT MOMENT
CORRELATION COEFFICIENT
In computing for Pearson’s r, let’s follow the following steps:

1. Construct the Null and Alternative Hypothesis.

2. State the level of significance.
3. Calculate the degrees of freedom (df = N-2) and determine the
critical value of t or the t critical.
4. Compute for the value of Pearson’s r.
5. Determine the t value
RAYMAR D. TEODORO, CPA
then make a decision.
DR. LUISITO ORMA
6. State the conclusion.
PEARSON PRODUCT MOMENT
CORRELATION COEFFICIENT

Where:
r = Pearson’s correlation coefficient
n = number of paired values
XRAYMAR
= value of the first
D. TEODORO, CPA variable
YDR.
= LUISITO
value ORMA
of the second variable
XY = the product of the two paired values
Example: Karl Pearson, a halo-halo owner, would like to
study the correlation between the temperature and sales
during the summer season. Random sample of 6 days is
selected with the results given as follow: Use level of
significance = 0.05.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
Step 1: Construct the Null and Alternative Hypothesis
HO : r = 0 (There is no correlation between temperature
and total sales of halo-halo during summer)

HA : r ≠ 0 (There is a correlation between temperature and

total sales of halo-halo during summer)

Step 2: State the Level of Significance

The level of significance is 0.05

RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
Step 3: Calculate the degrees of freedom (df = N-2) and
determine the critical value of t or the t critical.
Degree of freedom = N – 2
Degree of freedom = 6 -2
DF = 4
NOTE: Once the DF and level of significance are recognized,
we can now determine the critical value of t or the t-critical
using t-Table.

T. TABLE (CRITICAL VALUES FOR THE T DISTRIBUTIO

RAYMAR D. TEODORO, CPA
N)
DR. LUISITO ORMA
Step 4: Compute for the value of Pearson r
Let’s compute using the Excel file.

r = 0.95

Step 5: Determine the t value then make a decision

Let’s compute using the Excel file.

t value = 6.08
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
HOW TO DETERMINE THE DECISION?
To make decision, remember the following:

1. Always compare absolute values.

2. If t value is less than the t critical, then the decision is do
not reject the HO (Null Hypothesis).
3. If t value is greater than or equal to the t critical, then the
decision is reject the HO (Null Hypothesis).

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
Step 6: State the conclusion
1. Is there a relationship between two variables being tested?
We therefore conclude that there is a significant relationship between
the temperature and total sales of halo-halo.

2. What degree is their relationship or correlation?

There is very high positive correlation/relationship between the
temperature and total sales of halo-halo.
Please see below:

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
SPEARMAN RANK-ORDER
CORRELATION
The Spearman rank-order correlation coefficient (Spearman’s
correlation, for short) is a nonparametric measure of the
strength and direction of association that exists between two
variables measured on at least an ordinal scale. It is denoted by
the symbol rs (or the Greek letter ρ, pronounced rho or “row”).

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
How to calculate SPEARMAN RANK-
ORDER CORRELATION?

Where,
6 is a constant number
Summation of D squared = summation of the difference of two
scores
n = number
RAYMAR of pairs
D. TEODORO, CPA
DR. LUISITO ORMA
SPEARMAN RANK-ORDER
CORRELATION
Example: Spearman wants to know if there’s a significant
correlation between the grades of students in English and
Mathematics?

The following are the grades of 7 students in English and in

Mathematics: Level of significance at 0.01.

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
Step 1: Construct the Null and Alternative Hypothesis
HO : rs = 0 (There is no correlation between grades in
English and in Mathematics).
HA : rs ≠ 0 (There is a correlation between grades in English
and in Mathematics).

Step 2: State the Level of Significance

The level of significance is 0.01

RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
Step 3: Calculate the degrees of freedom (df = N-2) and
determine the critical value of t or the t critical.
Degree of freedom = N – 2
Degree of freedom = 7 -2
DF = 5
NOTE: Once the DF and level of significance are recognized,
we can now determine the critical value of t or the t-critical
using t-Table.

T. TABLE (CRITICAL VALUES FOR THE T DISTRIBUTIO

RAYMAR D. TEODORO, CPA
N)
DR. LUISITO ORMA
Step 4: Compute for the value of Pearson r
Let’s compute using the Excel file.

rs = -0.36

Step 5: Determine the t value then make a decision

Let’s compute using the Excel file.

t value = -0.86
RAYMAR D. TEODORO, CPA
DR. LUISITO ORMA
HOW TO DETERMINE THE DECISION?
To make decision, remember the following:

1. Always compare absolute values.

2. If t value is less than the t critical, then the decision is do
not reject the HO (Null Hypothesis).
3. If t value is greater than or equal to the t critical, then the
decision is reject the HO (Null Hypothesis).

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA
Step 6: State the conclusion
1. Is there a relationship between two variables being tested?
We therefore conclude that there is no significant relationship between the
grades of the students in English and in Mathematics.

2. What degree is their relationship or correlation?

There is a slight negative correlation/relationship between the grades in English
and in Mathematics.

Please see below:

RAYMAR D. TEODORO, CPA

DR. LUISITO ORMA