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LOGO
CORRELATION ANALYSIS
CORRELATION ANALYSIS
1101091-1101100PGDM-B
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Introduction
Correlation a LINEAR association between two random variables
Correlation analysis show us how to determine both the nature and strength of relationship between two variables
When variables are dependent on time correlation is applied
Correlation lies between +1 to -1
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A zero correlation indicates that there is no relationship between the variables
A correlation of –1 indicates a perfect negative correlation
A correlation of +1 indicates a perfect positive correlation
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Types of CorrelationThere are three types of correlation
Types
Type 1
Type 2
Type 3
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Type1
Positive
Negative No Perfect
If two related variables are such that when one increases (decreases), the other also increases (decreases).
If two variables are such that when one increases (decreases), the other decreases (increases)
If both the variables are independent
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When plotted on a graph it tends to be a perfect line
When plotted on a graph it is not a straight line
Type 2
Linear Non – linear
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Two independent and one dependent variable One dependent and more than one independent
variables One dependent variable and more than one
independent variable but only one independent variable is considered and other independent variables are considered constant
Type 3
Simple
Multiple
Partial
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Methods of Studying Correlation
Scatter Diagram Method
Karl Pearson Coefficient Correlation of Method
Spearman’s Rank Correlation Method
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Correlation: Linear Relationships
Strong relationship = good linear fit
Points clustered closely around a line show a strong correlation. The line is a good predictor (good fit) with the data. The more spread out the points, the weaker the correlation, and the less good the fit. The line is a REGRESSSION line (Y = bX + a)
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Coefficient of CorrelationA measure of the strength of the linear relationship
between two variables that is defined in terms of the (sample) covariance of the variables divided by their (sample) standard deviations
Represented by “r”
r lies between +1 to -1
Magnitude and Direction
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-1 < r < +1
The + and – signs are used for positive linear correlations and negative linear correlations, respectively
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2222 )()(
YYnXXn
YXXYnr xy
Shared variability of X and Y variables on the topIndividual variability of X and Y variables on the bottom
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Interpreting Correlation Coefficient r
strong correlation: r > .70 or r < –.70 moderate correlation: r is between .30
& .70or r is between –.30 and –.70
weak correlation: r is between 0 and .30 or r is between 0 and –.30 .
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Coefficient of Determination
Coefficient of determination lies between 0 to 1
Represented by r2
The coefficient of determination is a measure of how
well the regression line represents the data
If the regression line passes exactly through every
point on the scatter plot, it would be able to explain all
of the variation
The further the line is away from the points, the less it
is able to explain
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r 2, is useful because it gives the proportion of the variance
(fluctuation) of one variable that is predictable from the
other variable
It is a measure that allows us to determine how certain one
can be in making predictions from a certain model/graph
The coefficient of determination is the ratio of the
explained variation to the total variation
The coefficient of determination is such that 0 < r 2 < 1,
and denotes the strength of the linear association between
x and y
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The Coefficient of determination represents the percent of the data that is the closest to the line of best fit
For example, if r = 0.922, then r 2 = 0.850
Which means that 85% of the total variation in y can be explained by the linear relationship between x and y (as described by the regression equation)
The other 15% of the total variation in y remains unexplained
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Spearmans rank coefficient
A method to determine correlation when the data
is not available in numerical form and as an
alternative the method, the method of rank
correlation is used. Thus when the values of the
two variables are converted to their ranks, and
there from the correlation is obtained, the
correlations known as rank correlation.
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Computation of Rank Correlation
Spearman’s rank correlation coefficient ρ
can be calculated when
Actual ranks given
Ranks are not given but grades are given but not
repeated
Ranks are not given and grades are given and
repeated
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Testing the significance of correlation coefficient
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