Ch:4 – Correlation & Regression BBA 3

SEM

Module No.4
CORRELATION AND REGRESSION ANALYSIS

Meaning and Types of Correlation - Karl Pearson's Coefficient of Correlation (Deviation

from actual mean only) Spearman’s Rank Correlation Coefficient problems including
repeated rank assignment.

Meaning of Regression, Regression Lines, finding correlation coefficient using Regression

coefficient Regression Equations and estimating the variable .

MEANING OF CORRELATION:

Correlation is a statistical technique to ascertain the association or relationship

between two or more variables. Correlation analysis is a statistical technique to study the degree and

direction of relationship between two or more variables.

A correlation coefficient is a statistical measure of the degree to which changes

to

the value of one variable predict change to the value of another.

DEFINATION OF CORRELATION:

According to A.M. Tuttle -

“Correlation is an analysis of covariation between two or more variables.”

According to Croxton and Cowden -

“When the relationship is of a quantitative nature, the appropriate statistical tool for discovering and
measuring the relationship and expressing it in a brief formula is known as correlation.”

According to L.R. Connor -

“If two or more quantities vary in sympathy so that movements in one tend to be accompanied by
corresponding movements in others, then they are said to be correlated.”

ANURADHA.S
ISBR College Page 1
 Ch:4 – Correlation & Regression BBA 3
SEM

TYPES OF CORRELATION:

Correlation is described or classified in several different ways. Three of the most important are:

I. Positive and Negative

II. Simple, Partial and Multiple

III. Linear and non-linear

I. Positive, Negative and Zero Correlation:

Whether correlation is positive (direct) or negative (inversa) would depend upon the direction of change
of the variable.

Positive Correlation: If both the variables vary in the same direction, correlation is said to be positive. It
means if one variable is increasing, the other on an average is also increasing or if one variable is
decreasing, the other on an average is also deceasing, then the correlation is said to be positive
correlation.

For example: The correlation between heights and weights of a group of persons is a positive

Correlation.

Height (cm) : X 158 160 163 166 168 171 174

176
Weight (kg) : Y 60 62 64 65 67 69 71 72

Negative Correlation: If both the variables vary in opposite direction, the correlation is said to be
negative. If means if one variable increases, but the other variable decreases or if one variable decreases,
but the other variable increases, then the correlation is said to be negative correlation.

For example: The correlation between the price of a product and its demand is a negative correlation.

Price of Product (Rs. Per Unit) : X 6 5 4 3 2

1
Demand (In Units) : Y 75 120 175 250 215
400

Zero Correlation: If the existence of variable is absence & their is no relationship between the variables
then, it is said to be zero correlation. It means a change in value of one variable doesn’t influence or
change the value of other variable.

For example: The correlation between weight of person and intelligence is a zero or no correlation.

ANURADHA.S
ISBR College Page 2
 Ch:4 – Correlation & Regression BBA 3
SEM

II. Simple, Partial and Multiple Correlations:

The distinction between simple, partial and multiple correlations are based upon the number of variables
studied.

Simple Correlation: When only two variables are studied, it is a case of simple correlation.

For example: when one studies relationship between the marks secured by student and the attendance of
student in class.

Partial Correlation: In case of partial correlation one studies three or more variables but considers only
two variables to be influencing each other and the effect of other influencing variables being held
constant.

For example: The relationship between student marks and attendance, the other variable influencing
Such as effective teaching of teacher, use of teaching aid like computer, smart board etc are assumed to
be constant

Multiple Correlation : When the study is with three or more variables it is a multiple correlation.

For example: If study covers the relationship between student marks, attendance of students, effectiveness
of teacher, use of teaching aids etc, it is a case of multiple correlation.

III. Linear and Non-linear Correlation:

Depending upon the constancy of the ratio of change between the variables, the Correlation may be
Linear or Non-linear Correlation.

Linear Correlation: If the amount of change in one variable bears a constant ratio to the amount of
change in the other variable, then correlation is said to be linear line.

For example: If it is assumed that, to produce one unit of finished product we need 10 units of raw
materials, then subsequently to produce 2 units of finished product we need double of the one unit.

Raw material : X 10 20 30 40 50 60
Finished Product : Y 2 4 6 8 10 12

Non-linear Correlation: If the amount of change in one variable does not bear a constant ratio to the
amount of change to the other variable, then correlation is said to be non-linear.

For example: If we double the amount of advertisement expenditure, then sales volume would not
necessarily be doubled.

ANURADHA.S
ISBR College Page 3
 Ch:4 – Correlation & Regression BBA 3
SEM

Advertisement Expenses : X 10 20 30 40 50
60
Sales Volume : Y 2 14 16 8 10
22

METHODS OF MEASUREMENT OF CORRELATION:

Quantification of the relationship between variables is very essential to take the benefit of study of
correlation. For this, we find there are various methods of measurement of correlation, which can be
represented as given below:

Among these methods we will discuss only the following methods:

1. Karl Pearson’s Coefficient of Correlation

2. Spearman’s Rank Coefficient of Correlation

KARL PEARSON’S COEFFICIENT OF CORRELATION:

Karl Pearson’s method of calculating coefficient of correlation is based on the covariance of the
two variables in a series. This method is widely used in practice and the coefficient of correlation is
denoted by the symbol “r”.

ANURADHA.S
ISBR College Page 4
 Ch:4 – Correlation & Regression BBA 3
SEM

If the two variables under study are X and Y, the following formula suggested by Karl Pearson can be
used for measuring the degree of relationship of correlation.

Formula: (KPCC BY ACTUAL MEAN METHOD)

PROPERTIES OF COEFFICIENT OF CORRELATION:

1. The coefficient of correlation always lies between – 1 to +1, symbolically it can written as – 1 ≤ r ≤ 1.

2. The coefficient of correlation is independent of change of origin and scale.

ANURADHA.S
ISBR College Page 5
 Ch:4 – Correlation & Regression BBA 3
SEM

3. The coefficient of correlation is a pure number and is independent of the units of measurement. It
means if X represent say height in inches and Y represent say weights in kgs, then the correlation
coefficient will be neither in inches nor in kgs but only a pure number.

4. The coefficient of correlation is the geometric mean of two regression coefficient,

symbolically r =√ bxy ∗ byx

5. If X and Y are independent variables then coefficient of correlation is zero.

ADVANTAGE & DISADVANTAGE OF KPCC

Following are the Advantages of correlational research.

1. It studies the statistical relationship between the two variables.

2. It is less expensive and less time-consuming.
3. You can see the variables in a natural setting.
4. It is an alternative to experimental research.
5. It indicates the direction of variable.

There are some Disadvantages of correlational research as well.

1. This research is limited in its nature. It can only determine the relationship between two
variables not more than two variables.

2. It doesn’t prove the cause and effect between the variables. It means it doesn’t indicate which
variable becomes the cause of the statistical pattern.

3. You cannot have control over the variables. It only allows you to observe or spot the variables
and their statistical patterns.

4. The information you get from this research is limited. It only studies the relationship of
variables but does not find the cause.

ANURADHA.S
ISBR College Page 6
 Ch:4 – Correlation & Regression BBA 3
SEM

SPEARMANS RANK CORRELATION

When quantification of variables becomes difficult such beauty of female, leadership

ability, knowledge of person, Honesty etc, then this method of rank correlation is useful.
The Spearman rank correlation coefficient is a measure of the relationship between two variables when
data in the form of rank orders are available or in the form of attribute .

The correlation coefficient between these allotted two series of ranks is popularly called as “Spearman’s
Rank Correlation” and denoted by “R”

(i) When the Given Ranks are Repeated

(ii) When the Given Ranks are not Repeated

ANURADHA.S
ISBR College Page 7
 Ch:4 – Correlation & Regression BBA 3
SEM

REGRESSION:
MEANING:

A study of measuring the relationship between associated variables, wherein one

variable is dependent on another independent variable, called as Regression.

Regression analysis is a statistical tool to study the nature and extent of functional
relationship between two or more variables and to estimate (or predict) the unknown values of dependent
variable from the known values of independent variable.

The variable that forms the basis for predicting another variable is known as the
Independent Variable and the variable that is predicted is known as dependent variable.

USES OF REGRESSION ANALYSIS:

1. It provides estimates of values of the dependent variables from values of independent variables.

2. It is used to obtain a measure of the error involved in using the regression line as a basis for estimation.

3. With the help of regression analysis, we can obtain a measure of degree of association or correlation
that exists between the two variables.

4. It is highly valuable tool in economies and business research, since most of the problems of the
economic analysis are based on cause and effect relationship.

REGRESSION LINES AND REGRESSION EQUATION:

Regression lines and Regression equations are used synonymously. Regression equations are algebraic
expression of the regression lines. Let us consider two variables X & Y. If Y depends on x, then the result
comes in the form of simple regression. If we take the case of two variable X and Y, we shall have two
regression lines as the regression line of X on Y and regression line of Y on X

Simple linear regression model we have the following two regression lines:
ANURADHA.S
ISBR College Page 8
 Ch:4 – Correlation & Regression BBA 3
SEM

1. Regression line of Y on X: This line gives the probable value of Y (Dependent variable) for any given
value of X (Independent variable).

Regression line of Y on X: Y – Ẏ = byx (X – Ẋ) OR

: Y = a + bX

2. Regression line of X on Y: This line gives the probable value of X (Dependent variable) for any given
value of Y (Independent variable).

Regression line of X on Y : X – Ẋ = bxy (Y – Ẏ) OR

: X = a + by

REGRESSION COEFFICIENT:

The quantity “b” in the regression equation is called as the regression coefficient or slope coefficient.
Since there are two regression equations, therefore, we have two regression coefficients.

1. Regression Coefficient X on Y, symbolically written as “bxy”

2. Regression Coefficient Y on X, symbolically written as “byx”

Different formula’s used to compute regression coefficients:

REGRESSION WITH CORRELATION COEFFICIENT

The sample of a correlation coefficient is estimated in the correlation analysis. It ranges

between -1 and +1, denoted by r and quantifies the strength and direction of the linear association among
two variables.

R = √ bxy ∗ byx

ANURADHA.S
ISBR College Page 9
 Ch:4 – Correlation & Regression BBA 3
SEM

PROPERTIES OF REGRESSION COEFFICIENTS:

1. The coefficient of correlation is the geometric mean of the two regression

coefficients. Symbolically r =√ bxy ∗ byx .

2. If one of the regression coefficients is greater than unity, the other must be less than unity, since the
value of the coefficient of correlation cannot exceed unity.

3. Both the regression coefficient will have the same sign. i.e. they will be either positive or negative.

4. The coefficient of correlation will have the same sign as that of regression coefficient, i.e. if regression
coefficient have a negative sign, “r” will also have negative sign and if the regression coefficient have a
positive sign, “r” would also be positive.

For example, if bxy = -0.2 and byx = -0.8 then r = - √0.2 ∗ 0.8 = – 0.4

5. The average value of the two regression coefficient would be greater than the value of coefficient of
correlation. In symbol (bxy + byx) / 2 > r.

For example, if bxy = 0.8 and byx = 0.4 then average of the two values = (0.8 + 0.4) / 2 = 0.6 and

the value of r = √0.8 ∗ 0.4 = 0.566 which less than 0.6

6. Regression coefficients are independent of change of origin but not scale.

ANURADHA.S
ISBR College Page 10