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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: An instructor is interested in finding out how
the number of students on a given day is related
to the temperature of that day. A random sample
of 10 days was used for the study indicate the
number of students absent and the temperature
for each day.
Draw a Scatter Diagram of these data.
No.of
Absentees
8 7 5 4 2 3 5 6 8 9
Temperature
10 20 25 30 40 45 50 55 59 60
No.of Absentees
0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80
Temp
N
o
.
o
f

A
b
s
e
n
t
e
e
s
No.of Absentees
Karl .Pearsons Coefficient of Correlations is given by,
) )
) )
) )
) )




'
+

'

'
+

'

'
+

'

'
+

'

'
+

'

'
+

'

'
+

'

'
+

'


=
2
2
2
2
2
2
2
2
2 2
) , (
1 1 1 1
1 1 1
) , (
1 1
1
) , (
y y n x x n
y x xy n
y x r
y
n
y
n
x
n
x
n
y
n
x
n
xy
n
y x r
y y
n
x x
n
y y x x
n
y x r
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.
Spearman's Rank Correlation is given by
)
ns observatio of pair of no. is
R R d Where
) 1 (
6
1 ,
y x
2
2
n
n n
d
y x
=

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
)
repeated item an times of number is m ,
12
) 1 m(m
is factor correction Where
) 1 (
factor correction 6
1 ) , (
2
2
2

+
=

n n
d
y x
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.

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