Theory of Correlation

What is Correlation ?
The Correlation is a statistical tool which studies the relationship between two variables and correlation analysis involves various methods and techniques used for studying and measuring the extent of relationship between two variables .

Two variables are said to be correlated if the change in one variable results in a corresponding change in another variable .
Correlation Analysis is widely used in a bivariate distribution .

Types of Correlation
( I ) Positive and Negative Correlation : If the values of two variables deviate in the same direction then the correlation is said to be positive correlation . Example : Height and Weight , Demand and Supply . On the other hand Correlation is said to be negative , if variables deviate in the opposite direction . Example :The day temperature and sales of woolen garment , Price and Demand of a commodity .

Types of Correlation (Contd._)

( II ) Linear and Nonlinear Correlation : The correlation between two variables are said to be linear if corresponding to a unit change in one variable , there is constant change in the other variable over the entire range of values . If two variables x and y are linearly correlated then there exists a relationship of the form : y=a+bx (Equation of a straight line) On the other hand, two variables are said to be nonlinear or curvilinear if corresponding to a unit change in one variable , the other variable does not change at a constant rate but at a fluctuating rate .

Methods of Studying Correlation

The commonly used methods for studying Correlation between two variables are : (i) Scatter diagram Method. (ii) Karl-Pearsons Coefficient of Correlation. (iii) Rank Method. (iv)Concurrent Deviation Method.

Scatter Diagram Method : It is one of the simplest way of diagrammatic representation of a bivariate distribution and provides us one of the simplest tool of ascertaining the correlation between two variables . Suppose we are given n-pairs of values (x1,y1),(x2,y2),,(xn,yn) of two variables X and Y . These pairs of values may be plotted as dots(.) in the XY-Plane .The diagram of dots so obtained are known as Scatter Diagram .From Scatter diagram we can form a fairly good idea about the relationship between two variables X and Y , as follows :

(i)

If points are very dense ,i.e. very close to each other , a fairly good amount of correlation may be expected between two variables . On the other hand, if the points are widely scattered , poor correlation may be expected between them . (ii) If points on the Scatter diagram reveals any trend (either upward or downward), the variables are said to be correlated and if no trend revealed , then the variables are uncorrelated . (iii) If there is an upward trend rising from lower left hand corner and going upward to the upper right hand corner , then the correlation is positive. On the other hand, if the points depicts a downward trend from the upper left hand corner to the lower right hand corner , the correlation is negative . (iv) In particular , if all the points lie on the straight line starting from the left bottom and going up towards the right top , then correlation is perfect and positive .On the other hand ,if all the points lie on the straight line starting from the left top and coming down to right bottom , then correlation is perfect and negative .

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