Correlation Examples

Correlation Examples he correlation is one of the most common and most useful statistics. A correlation is a single number that describes the degree of relationship between two variables. Let's work through an example to show you how this statistic is computed. Correlation Example Let's assume that we want to look at the relationship between two variables, height (in inches) and self esteem. Perhaps we have a hypothesis that how tall you are effects your self esteem (incidentally, I don't think we have to worry about the direction of causality here -- it's not likely that self esteem causes your height!). Let's say we collect some information on twenty individuals (all male -- we know that the average height differs for males and females so, to keep this example simple we'll just use males). Height is measured in inches. Self esteem is measured based on the average of 10 1-to-5 rating items (where higher scores mean higher self esteem). Here's the data for the 20 cases (don't take this too seriously -- I made this data up to illustrate what a correlation is): Know More About Precalculus Help

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You should immediately see in the bivariate plot that the relationship between the variables is a positive one (if you can't see that, review the section on types of relationships) because if you were to fit a single straight line through the dots it would have a positive slope or move up from left to right. Since the correlation is nothing more than a quantitative estimate of the relationship, we would expect a positive correlation. What does a "positive relationship" mean in this context? It means that, in general, higher scores on one variable tend to be paired with higher scores on the other and that lower scores on one variable tend to be paired with lower scores on the other. You should confirm visually that this is generally true in the plot above. We use the symbol r to stand for the correlation. Through the magic of mathematics it turns out that r will always be between -1.0 and +1.0. if the correlation is negative, we have a negative relationship; if it's positive, the relationship is positive. You don't need to know how we came up with this formula unless you want to be a statistician. But you probably will need to know how the formula relates to real data -- how you can use the formula to compute the correlation. Let's look at the data we need for the formula. Here's the original data with the other necessary columns: The first three columns are the same as in the table above. The next three columns are simple computations based on the height and self esteem data. The bottom row consists of the sum of each column. This is all the information we need to compute the correlation. Here are the values from the bottom row of the table (where N is 20 people) as they are related to the symbols in the formula

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z scores table
z scores table The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company. The Z-score is a linear combination of four or five common business ratios, weighted by coefficients. The coefficients were estimated by identifying a set of firms which had declared bankruptcy and then collecting a matched sample of firms which had survived, with matching by industry and approximate size (assets). Altman applied the statistical method of discriminant analysis to a dataset of publicly held manufacturers. The estimation was originally based on data from publicly held manufacturers, but has since been re-estimated based on other datasets for private manufacturing, nonmanufacturing and service companies.

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The original data sample consisted of 66 firms, half of which had filed for bankruptcy under Chapter 7. All businesses in the database were manufacturers, and small firms with assets of < $1 million were eliminated. Altman's work built upon research by accounting researcher William Beaver and others. In the 1930s and on, Mervyn and others had collected matched samples and assessed that various accounting ratios appeared to be valuable in predicting bankruptcy. Altman's Z-score is a customized version of the discriminant analysis technique of R. A. Fisher (1936). William Beaver's work, published in 1966 and 1968, was the first to apply a statistical method, t-tests to predict bankruptcy for a pair-matched sample of firms. Beaver applied this method to evaluate the importance of each of several accounting ratios based on univariate analysis, using each accounting ratio one at a time. Altman's primary improvement was to apply a statistical method, discriminant analysis, which could take into account multiple variables simultaneously. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event, with a Type II error (false positives) of 6% (Altman, 1968). In a series of subsequent tests covering three different time periods over the next 31 years (up until 1999), the model was found to be approximately 8090% accurate in predicting bankruptcy one year prior to the event, with a Type II error (classifying the firm as bankrupt when it does not go bankrupt) of approximately 1520% (Altman, 2000). From about 1985 onwards, the Z-scores gained wide acceptance by auditors, management accountants, courts, and database systems used for loan evaluation (Eidleman). The formula's approach has been used in a variety of contexts and countries, although it was designed originally for publicly held manufacturing companies with assets of more than $1 million. Later variations by Altman were designed to be applicable to privately held companies (the Altman Z'-Score) and non-manufacturing companies (the Altman Z"-Score). Read More About Online Math Tutor Math.Tutorvista.com

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ThankYou

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