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Correlation

Correlation analysis is a statistical method that evaluates the strength of the relationship between two quantitative variables, with correlation coefficients ranging from -1.0 to +1.0 indicating the nature of the relationship. Regression analysis estimates relationships between dependent and independent variables, using regression equations to model future relationships. Both methods are essential in statistical analysis, with correlation focusing on association and regression on prediction.

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9 views31 pages

Correlation

Correlation analysis is a statistical method that evaluates the strength of the relationship between two quantitative variables, with correlation coefficients ranging from -1.0 to +1.0 indicating the nature of the relationship. Regression analysis estimates relationships between dependent and independent variables, using regression equations to model future relationships. Both methods are essential in statistical analysis, with correlation focusing on association and regression on prediction.

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shwetayadav.1889
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Correlation

Analysis
Unit 3
Correlation analysis
• Correlation analysis is a statistical method used to
evaluate the strength of relationship between two
quantitative variables. A high correlation means that
two or more variables have a strong relationship with
each other, while a weak correlation means that the
variables are hardly related.
• Scatter Diagram
• Coefficient of Correlation
Scatter Plot
• A scatter plot is a type of plot or mathematical diagram using
Cartesian coordinates to display values for typically two
variables for a set of data. If the points are coded, one
additional variable can be displayed.
Meaning of
Correlation

In statistics, correlation or dependence is


any statistical relationship, whether Correlation is a statistic that measures
causal or not, between two random the degree to which two variables move
variables or bivariate data. In the in relation to each other. In finance,
broadest sense correlation is any the correlation can measure the
statistical association, though it movement of a stock with that of a
commonly refers to the degree to which a benchmark index, such as the S&P 500.
pair of variables are linearly related.
Correlation measures association, but
doesn't show if x causes y or vice
versa, or if the association is caused
by a third–perhaps unseen–factor.

Correlations are used in


advanced portfolio
management, computed as
the correlation coefficient, which has
a value that must fall between -1.0
and +1.0.
Correlation” is a statistical term
describing the degree to which two
variables move in coordination with
one-another.

If the two variables move in the


same direction, then those
Definition variables are said to have a positive
correlation.

If they move in opposite directions,


then they have a negative
correlation.
A correlation of r = 0.9 suggests a
strong, positive association
between two variables

A correlation of r = -0.2 suggest a


Example weak, negative association.

A correlation close to zero suggests


no linear association between two
continuous variables.
Relation

A perfect positive correlation means that the correlation coefficient is


exactly 1. This implies that as one security moves, either up or down,
the other security moves in lockstep, in the same direction.

A perfect negative correlation means that two assets move in


opposite directions, while a zero correlation implies no linear
relationship at all.
Sum
X Y
3 11
7 16
4 9
2 4
1 7
4 6
1 3
2 8
Sum

X Y
3 11
7 16
4 9
2 4
1 7
4 6
1 3
2 8
Regression
Unit 3
Regression Analysis
• Regression analysis is a set of statistical
methods used for the estimation of
relationships between a dependent variable
and one or more independent variables. It
can be utilized to assess the strength of the
relationship between variables and for
modeling the future relationship between
them.
Regression Lines
• The Regression Line is
the line that best fits the
data, such that the overall
distance from the line to
the points (variable
values) plotted on a graph
is the smallest. In other
words, a line used to
minimize the squared
deviations of predictions is
called as the regression
line.
The functional relation developed
between the two correlated
variables are called regression
equations.

Regression The regression


equation of x on y is:
where bxy-the
regression
coefficient of
Equation (X – X̄ ) = bxy (Y – Ȳ) x on y.

The regression where byx-the


regression
equation of y on x is: coefficient of
(Y – Ȳ) = bxy (X – X̄ ) y on x.
( ∑ 𝑥 )( ∑ 𝑦 )
∑ 𝑥𝑦 − 𝑛
𝑏𝑥 𝑦 =
∑ 𝑦 −¿ ¿ ¿ ¿
2
The dependent and independent variables show a linear
relationship between the slope and the intercept.

Regressio The independent variable is not random.

n Analysis
The value of the residual (error) is zero.
– Linear
model The value of the residual (error) is constant across all
observations.
assumptio The value of the residual (error) is not correlated across
ns all observations.

The residual (error) values follow the normal


distribution.
Find the Regression equation from
the following
X Y
4 10
6 11
8 13
9 17
10 20
X Y XY
4 10 40 16 100
6 11 66 36 121
8 13 104 64 169
9 17 153 81 289
10 20 200 100 400
37 71 563 297 1079
Find the Regression equation from
the following
Price Demand
100 40
120 38
110 43
110 45
160 37
150 23
• Simple linear regression is a model
that assesses the relationship
between a dependent variable and
an independent variable. The
simple linear model is expressed

Regression
using the following equation:
Y = a + bX + ϵ

Analysis – Where:

Simple linear Y – Dependent variable


X – Independent (explanatory)
regression variable
a – Intercept
b – Slope
ϵ – Residual (error)
Multiple linear regression analysis is
essentially similar to the simple
linear model, with the exception that
multiple independent variables are

Regression
used in the model. The mathematical
representation of multiple linear
regression is:

Analysis – Y = a + bX1 + cX2 + dX3 + ϵ

Multiple Where:

linear Y – Dependent variable


X1, X2, X3 – Independent

regression (explanatory) variables


a – Intercept
b, c, d – Slopes
ϵ – Residual (error)

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