CORRELATION

PRESENTED BY:
SWATI SINGH (165) SHASHI PRABHA (160) JYOTI SHARMA (136) SAMIKSHA GUPTA (154)

Content
What is correlation? Importance of correlation Types of correlation Methods to measure correlation Formula for Karl Pearsons Coefficient of Correlation Real life problem and solution.

What is Correlation?
Correlation is a statistical tool which is used to find, whether there exists any relationship between 2 or more variables. It was developed by Sir Francis Galton in 1888 and Karl Pearson in 1896.

Importance of Correlation
Prediction of one variable .
The effect of correlation is to reduce the range of uncertainity of our prediction. The measure of coefficient of correlation is relative measure of change.

Types of Correlation
Positive & Negative correlation: Simple & Multiple correlation: Partial & Total correlation:
Positive: x & y move in the same direction. Negative: x & y move in opposite directions.

Simple: there is only 1 independent variable. Eg: y=f(x) Multiple: there exists more than 1 independent variable. Eg: y=f(x,z)
Partial: finding the change in the dependent variable for a change in one independent variable, keeping the other independent variables constant.

Total: finding the change in dependent variable, when all the variables change simultaneously.

 There are various methods to measure correlation: Scatter diagram

Methods to measure correlation

Karl Pearsons correlation coefficient Spearmans Rank correlation coefficient Method of least squares, i.e, regression.

Formula for Karl Pearsons Coefficient of Correlation

Where, r = coefficient of correlation ; The value of r lies between +1 & -1. Value of r (a) If r = +1 (b) If r =-1 (c) If r =0 interpretation Perfect positive correlation Perfect negative correlation No correlation

REAL LIFE PROBLEM

Dave Proffitt, a second- year MBA student, is doing a study of companies going public for the first time. He is curious to see whether there is a significant relationship between the size of the offerings and the price per share.

SIZE OF OFFERINGS ($ millions)

108.00

PRICE PER SHARE($)

12.00

4.40
3.50 3.60 39.00 68.40 7.50 5.50 375.00 12.00

4.00
5.00 6.00 13.00 19.00 8.50 5.00 15.00 6.00

51.00
66.00

12.00
12.00

10.40
4.00

6.50
3.00

 Calculated table Calculations: RESULT: The coefficient of correlation comes out to be 0.584. This value is near +1, so we can say, that there is a positive correlation between the size of the offerings and the price per share.