Unit : II (Correlation)

Subject Code : MMBA22005

Subject Name : Business Statistics for
Managers
Delivered by : Dr. P.Sona
Correlation
.

Let X and Y be two random variables, Correlation is the measure of co variability taking
into account for the variance of X and Y.

KARL PEARSON’S COEFFICIENT OF CORRELATION

Of the several mathematical methods of measuring correlation, the Karl Pearson’s method,
popularly known as Pearson’s coefficient of correlation, is most widely used in practice.
The Pearson coefficient of correlation is denoted by the symbol ‘r’.
Note:
Correlation coefficient:

Let X and Y be two random variables, the correlation coefficient denoted by 𝜌𝑥𝑦 , is defined
𝑥−𝑥 𝑦−𝑦
by 𝜌𝑥𝑦 =
𝑥−𝑥 2 𝑦−𝑦 2
Probable error-correlation
Properties of coefficient of correlation.

The following are the main properties of correlation.

(i)Coefficient of Correlation lies between -1 and +1:
The coefficient of correlation cannot take value less than -1 or more than one +1.
Symbolically,
-1<=r<= + 1 or | r | <1.

(ii) Coefficients of Correlation are independent of Change of Origin:

This property reveals that if we subtract any constant from all the values of X and Y, it
will not affect the coefficient of correlation.

(iii) Coefficients of Correlation possess the property of symmetry:

The degree of relationship between two variables is symmetric

(iv) Coefficient of Correlation is independent of Change of Scale:

This property reveals that if we divide or multiply all the values of X and Y, it will not
affect the coefficient of correlation.
 Correlation coefficient

Measures the strength of relationship between variables..

Types of correlation:

Types of correlation:
( i) positive and negative
(ii) Simple, partial and multiple
(iii) Linear, nonlinear.
 Positive Correlation

The correlation in the same direction is called positive correlation. If one variable increase
other is also increase and one variable decrease other is also decrease. For example, the
length of an iron bar will increase as the temperature increases.

Negative Correlation
The correlation in opposite direction is called negative correlation, if one variable is
increase other is decrease and vice versa, for example, the volume of gas will decrease
as the pressure increase or the demand of a particular commodity is increase as price of
such commodity is decrease.

No Correlation

If there is no relationship between the two variables such that the value of one variable
change and the other variable remain constant is called no or zero correlation.
 Scatter Diagram
The scatter diagram is known by many names, such as scatter plot, scatter graph, and
correlation chart. This diagram is drawn with two variables, usually the first variable is
independent and the second variable is dependent on the first variable.

The scatter diagram is used to find the correlation between these two variables. This
diagram helps you determine how closely the two variables are related. After determining
the correlation between the variables, you can then predict the behavior of the dependent
variable based on the measure of the independent variable. This chart is very useful when
one variable is easy to measure and the other is not.
Type of Scatter Diagram
Scatter Diagram with Positive Correlation

In a Positive Correlation, variables under study move in the same direction

For Example..

(i) Study time & mark obtained

(ii) Profit & investment
(iii) Electricity bill & Temperature
Scatter Diagram with Negative Correlation

In a Negative Correlation, variables under study move in opposite direction

For Example..

(i) Speed & Travel time

(ii) Price & Demand
(iii) Age & Eye vision
 Scatter Diagram with No Correlation

If two variables are said to be uncorrelated , when the change in one variable does not let to
any change in another variable in a certain direction.
For Example..
(i) Age & Intelligence
(ii) Weight & Energy
 Scatter Diagram with No Correlation
This type of diagram is also known as “Scatter Diagram with Zero Degree of Correlation”.

Scatter Diagram with Weak Positive Correlation

 Scatter Diagram with Strong Negative Correlation

Scatter Diagram with Weak Negative Correlation

Draw a scatter diagram for the following data
X 2 3 5 6 8 9
Y 6 5 7 8 12 11

a) Make a scatter diagram

b) Is there any correlation between the variables X& Y
c) By graphic inspection, draw an estimating line
Solution:
Draw a scatter diagram for the following data
X 3 5 7 9 11 13
Y 5 8 11 13 15 17

Solution:
Calculate the coefficient of correlation between 𝒙&𝒚 from the following data
x 1 3 5 8 9 10
y 3 4 8 10 12 11
Solution:

x y 𝒙−𝒙 𝒚−𝒚 𝒙−𝒙 𝟐 𝒚−𝒚 𝟐 𝒙−𝒙 𝒚−𝒚

1 3 -5 -5 25 25 25
3 4 -3 -4 9 16 12
5 8 -1 0 1 0 0
8 10 2 2 4 4 4
9 12 3 4 9 16 12
10 11 4 3 16 9 12

36 48 0 0 64 70 65

𝑥 36 𝑦 48
𝑥= = = 6, 𝑦= = =8
𝑛 6 𝑛 6
𝑥−𝑥 𝑦−𝑦 65
Correlation Coefficient= = = 0.97
𝑥−𝑥 2 𝑦−𝑦 2 64 70
Calculate Karl Pearson’s coefficient of correlation from the following data

Roll No. of Students 1 2 3 4 5

Marks in Accountancy 48 35 17 23 47
Marks in Statistics 45 20 40 25 45

Solution:

where
Karl Pearson’s Correlation coefficient

Solution:
Karl Pearson’s Correlation coefficient

Mean: Standard deviation:

Covariance:
Correlation Coefficient:
Calculation of Correlation coefficient when change of scale and origin made

Since r is a pure number, shifting the origin and changing the scale of series does not
affect the values.
Calculate coefficient of correlation from the following data
X 100 200 300 400 500 600 700
Y 30 50 60 80 100 110 130

Solution:
Calculate coefficient of correlation from the following data and probable error. Assume 69
and 112 as the mean value for X and Y respectively.
X 78 89 99 60 59 79 68 61
Y 125 137 156 112 107 136 123 108

Solution:
Total of the product of deviations of X and Y series=3, 044
Number of pairs of observations=10
Total of the deviations of X series= -170
Total of the deviations of Y series= -20
Total of the squares deviations of X series= 8, 288
Total of the squares deviations of Y series= 2, 264
Find out the coefficient of correlation when the assumed means of X series and
Y series are 82 and 68 respectively.
Solution:
We are given
Solution: Calculations for correlation coefficient
𝑥 544 𝑦 552
𝑥= = = 68 , 𝑦= = = 69
𝑛 8 𝑛 8

𝑥−𝑥 𝑦−𝑦
Correlation Coefficient= =
𝑥−𝑥 2 𝑦−𝑦 2
x y 𝒙−𝒙 𝒚−𝒚 𝒙−𝒙 𝟐 𝒚−𝒚 𝟐 𝒙−𝒙 𝒚−𝒚
65 67 -3 -2 9 4 6
66 68 -2 -1 4 1 2
67 65 -1 -4 1 16 4
67 68 -1 -1 1 1 1
68 72 0 3 0 9 0
69 72 1 3 1 9 3
70 69 2 0 4 0 0
72 71 4 2 16 4 8

544 552 36 44 24

𝑥−𝑥 𝑦−𝑦 24
Correlation Coefficient= = = 0.6
𝑥−𝑥 2 𝑦−𝑦 2 36 44
Rank correlation coefficient

The coefficient of correlation between the ranks 𝑥𝑖 & 𝑦𝑖 is called the rank correlation
coefficient between the characteristics A & B , is given by

6 𝑛𝑖=1 𝑑𝑖 2
𝑟 =1− where 𝑑𝑖 = 𝑥𝑖 − 𝑦𝑖 .
𝑛 𝑛2 − 1
Calculate rank correlation coefficient for following data

Mathematics 85 60 73 40 90
Statistics 93 75 65 50 80

Solution:
x Ranks y Ranks of x-y=d d2
of x y
85 93
60 75
73 65
40 50
90 80
Total

Rank correlation is
6 𝑛𝑖=1 𝑑𝑖 2 6𝑋4
𝑟 =1− = 1− = 0.8
𝑛 𝑛2 − 1 5𝑋24
Calculate rank correlation coefficient for following data

Mathematics 85 60 73 40 90
Statistics 93 75 65 50 80

Solution:
x Ranks y Ranks of x-y=d d2
of x y
85 2 93 1 1 1
60 4 75 3 1 1
73 3 65 4 -1 1
40 5 50 5 0 0
90 1 80 2 -1 1
Total 4

Rank correlation is
6 𝑛𝑖=1 𝑑𝑖 2 6𝑋4
𝑟 =1− = 1− = 0.8
𝑛 𝑛2 − 1 5𝑋24
Ten competitors in a musical test were ranked by 3 judges X,Y,Z in the following order
A B C D E F G H I J
Rank by X 1 6 5 10 3 2 4 9 7 8
Rank by Y 3 5 8 4 7 10 2 1 6 9
Rank by Z 6 4 9 8 1 2 3 10 5 7

Using rank correlation method ,Discuss which pair of judges has the nearest approach.
Solution:

X y Z
1 3 6 -2 -3 -5 4 9 25
6 5 4 1 1 2 1 1 4
5 8 9 -3 -1 -4 9 1 16
10 4 8 6 -4 2 36 16 4
3 7 1 -4 6 2 16 36 4
2 10 2 -8 8 0 64 64 0
4 2 3 2 -1 1 4 1 1
9 1 10 8 -9 -1 64 81 1
7 6 5 1 1 2 1 1 4
8 9 7 -1 2 1 1 4 1

200 214 60
The rank correlation between x & y is

6 𝑑1 2 (6 × 200)
𝑟1 𝑥, 𝑦 = 1 − =1− = −0.212
𝑛 𝑛2 − 1 10(100 − 1)
The rank correlation between y & z is

6 𝑑2 2 (6 × 214)
𝑟2 𝑦, 𝑧 = 1 − =1− = −0.296
𝑛 𝑛2 − 1 10(100 − 1)

The rank correlation between x & z is

6 𝑑3 2 (6 × 60)
𝑟3 𝑥, 𝑧 = 1 − =1− = 0.636
𝑛 𝑛2 − 1 10(100 − 1)

Since 𝑟3 𝑥, 𝑧 is maximum and also positive, we conclude that the pair of judges x &
z has the nearest approach to common likings in music
Repeated Ranks
Example: Repeated Ranks

Solution: Calculation for Rank Correlation

Similarly in
1. Calculate coefficient of correlation between 𝒙&𝑦.
x 1 2 3 4 5 6 7 8 9
y 12 11 13 15 14 17 16 19 18
1. The following are the ranks obtained by 10 students. Calculate rank correlation coefficient
Statistics 1 2 3 4 5 6 7 8 9 10
Mathematics 1 4 2 5 3 9 7 10 6 8