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Correlation Analysis

Correlation analysis measures the relationship between two variables. The correlation coefficient ranges from -1 to 1, where 0 indicates no relationship and values closer to 1 or -1 indicate a strong relationship. Pearson's correlation coefficient is used for interval or ratio data and measures the linear relationship between standardized variables. Spearman's rank correlation coefficient is used for ordinal data and measures the monotonic relationship between ranked variables. The coefficient of determination measures the proportion of variability in one variable explained by the other variable.

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37 views13 pages

Correlation Analysis

Correlation analysis measures the relationship between two variables. The correlation coefficient ranges from -1 to 1, where 0 indicates no relationship and values closer to 1 or -1 indicate a strong relationship. Pearson's correlation coefficient is used for interval or ratio data and measures the linear relationship between standardized variables. Spearman's rank correlation coefficient is used for ordinal data and measures the monotonic relationship between ranked variables. The coefficient of determination measures the proportion of variability in one variable explained by the other variable.

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MarvinDube20114
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CORRELATION

ANALYSIS
DR F CHINJOVA
WHAT IS CORRELATION ANALYSIS

• Correlation analysis is a statistical procedure that is used to measure the extent to which
variables are related or associated.
• Two variables are highly correlated if they move together.
• Correlation analysis answers the following questions:
1) Is there a linear relationship between two variables?
2) If yes, how strong is that relationship?
CORRELATION COEFFICIENT

• The correlation coefficient is a numerical measure of the strength of the linear


relationship between two variables, and .
• A correlation coefficient takes values between
INTERPRETATION OF THE CORRELATION
COEFFICIENT
 If This implies there is essentially lack of linearity.
 If
 If
 If
 If
 If
PEARSON’ S PRODUCT MOMENT CORRELATION
COEFFICIENT
• This is based on a mean and standard deviation.
• This is calculated for ratio data or interval data.
EXAMPLE

• The following data are a random sample of indexed prices of gold and platinum over a
six year period.
Gold price (X) 12 10 14 11 12 9
Platinum price (Y) 18 17 23 19 20 15

• Required
• Calculate Pearson’s correlation coefficient and interpret the results.
SOLUTION

•
•
• Interpretation
• There is a strong positive correlation between the prices of gold and platinum. When the
prices of platinum increases, that of gold also increases, holding all other things equal.
QUESTION

• A random sample of 10 MBA students obtained the following marks in Financial Management
and Policy and Business Statistics modules in their final examinations in year 2020:
Financial Mgt & 76 62 70 59 52 53 53 56 57 56
Policy

Business Statistics 80 68 73 63 65 68 65 63 65 66

• Required

a) Calculate the Pearson’s Correlation Coefficient for the data.


b) Comment on the extent to which the performance of Business Statistics is associated to the
performance of Financial Management and Policy.
SPEARMAN’S RANK CORRELATION
COEFFICIENT
• The Spearman’s correlation coefficient is calculated for ranked data.
• This is data measured on the ordinal scale.
• The formula is given by:

• Where
EXAMPLE

• A panel of two judges ranked the performance of 5 drama groups (A; B; C; D and E) as
follows:
Drama group A B C D E
Judge 1 4 5 1 3 2
Judge 2 5 4 2 3 1
• Is there agreement in the manner in which the judges perceive the performance of the
drama groups?
SOLUTION

Judge 1 Judge 2
4 5

5 4

1 2

3 3

2 1

•
•
• The correlation coefficient is fairly high and positive showing that the judges do not
differ in the way they perceive the performance of the drama groups.
QUESTIONS

• Question
• An examiner and a moderator marked 7 examination scripts during a standardisation
process and awarded the following percentage scores
Script number 1 2 3 4 5 6 7

Examiner 67 54 38 70 42 70 80

Moderator 58 60 38 67 44 69 76

• Calculate Spearman’s rank correlation coefficient and comment on the result obtained.
COEFFICIENT OF SIMPLE DETERMINATION

• The coefficient of determination is obtained by squaring Pearson’s Correlation


Coefficient.

• Coefficient of determination measures the strength of the linear relationship between the
independent variable X and the dependent variable Y
• Coefficient of determination gives the proportion of variability in the dependent variable
that is explained by changes in the independent variable.

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