CUB, B.Com 4 Semester Business Statistics - Rani Channamma University, Belagavi B.Com - 4‘ Semester Business Statistics — II UNIT - 4 : CORRELATION Introduction: In today’s business world we come across many activities, which are dependent on each other. In businesses we see large number of problems involving the use of two or more variables. Identifying these variables and its dependency helps us in resolving the many problems. Many times there are problems or situations where two variables seem to move in the same direction such as both are increasing or decreasing. At times an increase in one variable is accompanied by a decline in another. For example, family income and expenditure, price of a product and its demand, advertisement expenditure and sales volume etc. If two quantities vary in such a way that movements in one are accompanied by movements in the other, then these quantities are said to be correlated. Meaning: 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. 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. When the fluctuation of one variable reliably predicts a similar fluctuation in another variable, there's often a tendency to think that means that the change in one causes the change in the other. Uses of correlations: 1. Correlation analysis helps inn deriving precisely the degree and the direction of such relationship. 2. The effect of correlation is to reduce the range of uncertainity of our prediction. The prediction based on correlation analysis will be more reliable and near to reality. 3. Correlation analysis contributes to the understanding of economic behaviour, aids in locating the critically important variables on which others depend, may reveal to the economist the connections by which disturbances spread and suggest to him the paths through which stabilizing farces may become effective 4. Economic theory and business studies show relationships between variables like price and quantity demanded advertising expenditure and sales promotion measures ete. 5. The measure of coefficient of correlation is a relative measure of change.CUB, B.Com 4 Semester Business Statistics - I ‘Types of Correlation: Correlation is described or classified in several different ways. Three of the most important are: I. _ Positive and Negative Il. Simple, Partial and Multiple IIL, Linear and non-linear I. Positive, Negative and Zero Correlation: Whether correlation is positive (direct) or negative (in-versa) 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):¥ | 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) : ¥ 75 120 | 175 [ 250 | 215 | 400 Zero Correlation: Actually it is not a type of correlation but still itis called as zero or no correlation, When we don’t find any 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. IL Simple, Partial and Multiple Correlation: The distinction between simple, partial and multiple correlation is 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, it is a problem of simple correlation. 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, in above example of 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.CUB, B.Com 4 Semester Business Statistics - I Multiple Correlation: When three or more variables are studied, it is a case of multiple correlation, For example, in above example if study covers the relationship between student marks, attendance of students, effectiveness of teacher, use of teaching aids ete, it is a case of multiple correlation, IIL. 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. If such variables are plotted on a graph paper all the plotted points would fall on a straight 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. If such variables are plotted on a graph, the points would fall on a curve and not on a straight line. For example, if we double the amount of advertisement expenditure, then sales volume would not necessarily be doubled. ‘Advertisement Expenses : X 10 20 30 40 50 60 Sales Volume : ¥ 2 4 6 8 10 12 Illustration 01: State in each case whether there is (a) Positive Correlation (b) Negative Correlation (No Correlation SINO Particulars Solution 1_| Price of commodity and its demand Negative 2__| Yield of crop and amount of rainfall Positive 3__| No of fruits eaten and hungry of a person Negative 4 | No of units produced and fixed cost per unit Negative 5 _| No of girls in the class and marks of boys No Correlation 6 _| Ages of Husbands and wife Positive 7__| Temperature and sale of woollen garments Negative 8_| Number of cows and milk produced Positive 9 _| Weight of person and intelligence No Correlation 10 _| Advertisement expenditure and sales volume PositiveCUB, B.Com 4" Semester Business Statistics - 1 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: Methods of Measurement of Correlation Graphic Method Algebric Method . Karl Pearson's Correlation 2, Spearman's Rank Coefficient of Correlation 3. Concurrent Deviation Method . Method of Least Square Coefficient of 1, Scatter Diagram 2. Graph Method Among these methods we will discuss only the following methods: 1, Scatter Diagram 2. Karl Pearson’s Coefficient of Correlation 3, Spearman’s Rank Coefficient of Correlation Scatter Diagram: This is graphic method of measurement of correlation. It is a diagrammatic representation of bivariate data to ascertain the relationship between two variables Under this method the given data are plotted on a graph paper in the form of dot. i.e. for each pair of X and Y values we put dots and thus obtain as many points as the number of observations. Usually an independent variable is shown on the X-axis whereas the dependent variable is shown on the Y-axis. Once the values are plotted on the graph it reveals the type of the correlation between variable X and Y. A scatter diagram reveals whether the movements in one series are associated with those in the other series. + Perfect Positive Correlation: In this case, the points will form on a straight line falling from the lower left hand corner to the upper right hand corner. * Perfect Negative Correlation: In this case, the points will form on a straight line rising from the upper left hand corner to the lower right hand corner. * High Degree of Positive Correlation: In this case, the plotted points fall in a narrow band, wherein points show a rising tendency from the lower left hand corner to the upper right hand corner.CUB, om 4" Semester ‘Businass Statistics ~ Il High Degree of Negative Correlation: In this case, the plotted points fall in a narrow band, wherein points show a declining tendency from upper left hand corner to the lower right hand corner. Low Degree of Positive Correlation: If the points are widely scattered over the diagrams, wherein points are rising from the left hand corner to the upper right hand corner. Low Degree of Negative Correlation: If the points are widely scattered over the diagrams, wherein points are declining from the upper left hand corner to the lower right hand corner. Zero (No) Correlation: When plotted points are scattered over the graph haphazardly, then it indicate that there is no correlation or zero correlation between two variables. Perfect Positive Correlation Perfect Negative Correlation 35 25 78 ns: 15; 25: it 35 25: w Diagram - High Positive Correlation Diagram - Ill 125 125 0 78 28 25 10 Diagram - II High Negative Correlation w 25 as 10 128 Diagram - IV 2s 78 2s rtCUB, om 4" Semester ‘Businass Statistics - 1! Lov Postive Correlation Low Negative Correlation 2s 25 73: “ i bi 75 7 a son oo Senn thon 2 5 a 2 25: iat 25 Diagram - V Diagram - VI No Correlation ns 25 73: a - 14 mei mC . . som a 5 miles 25. o Ly 25, fi i Diagram - VII Mlustration 0: Given the following pairs of values: ny a Sy Joo ko 11 [12 Capital Employed (Rs. In Crore) |_1 3 [4 Profit (Rs, In Lakhs) 3[s[4 [7 9 | 8 | 10] 11] 12 | 14 (a) Draw a scatter diagram (b)Do you think that there is any correlation between profits and capital employed? Is it positive or negative? Is it high or low? Solution: From the observation of scatter diagram we can say that the variables are positively correlated. In the diagram the points trend toward upward rising from the lower left hand corner to the upper right hand corner, hence it is positive correlation. Plotted points are in narrow band which indicates that it is a case of high degree of positive correlation.CUB, B.Com 4 Semester Businoss Statistics -t Profit (Rs. in Lakhs) ° 2 4 6 8 06a Capital Employed (Rs. in Crore) 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’. 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. Covariance (x,y) Cov(X, Y) r= "S.D.@)S.D.(9) > 0, 0, a where , n(Sxy)- Pa any __3@-%)Y-¥) Where, ¥-mean of X variable D(x-R)? | (v-¥)% y-mean of Y variable _Z fax) fay) N - andy) facyas) n2- LIED? ay) ng BLAN NA Above different formula’s can be used in different situation depending upon the information given in the problemCUB, B.Com 4 Semester Businass Statistics - I Mlustration 0: From following information find the correlation coefficient between advertisement expenses and sales volume using Karl Pearson's coefficient of correlation method. Firm 1[/2[3/4/5[6)]7]8|9]10 ‘Advertisement Exp. (Rs. In Lakhs) | 11 | 13 | 14 | 16 | 16 | 15 | 15 | 14 | 13 [13 Sales Volume (Rs. In Lakhs) 50 | 50 | 55 | 60 | 65 | 65 | 65 | 60 | 60 | 50 Solution: Let us assume that advertisement expenses are variable X and sales volume are variable Y. Calculation of Karl Pearson's coefficient of correlation Firm x Y_|x=x-x| x? |y=y-¥| y* xy, 1 1 50 “3 9 8 64 24 2 13 50 1 1 8 64 8 3 14 55 0 0 3 9 0 4 | 16 60 2 4 2 4 4 5 | 16 65 2 4 7 49 14 6 15 65 1 1 7 49 7 7 15 65 1 1 7 49 7 8 | 14 60 0 0 2 4 0 9 13 60 1 1 2 4 2 io | 13 50 1 1 8 64 8 140 | 580 22 360 70 =x xY x2 Zy2 xy __7 Vam360 ~ as908 Interpretation: From the above calculation it is very clear that there is high degree of positive correlation ic. r = 0.7866, between the two variables. i.e. Increase in advertisement expenses leads to increased sales volume. Illustration 04: Find the correlation coefficient between age and playing habits of the following students using Karl Pearson's coefficient of correlation method. Age 15 16 17 18 19 20 Number of students 250 | 200 | 150 120 | 100 | 80 Regular Players 200 | 150 | 90 48 30 12RCUB, B.Com 4" Semester Business Statistics - Il Solution: To find the correlation between age and playing habits of the students, we need to compute the percentages of students who are having the playing habit. Percentage of playing habits = No. of Regular Players / Total No. of Students * 100 Now, let us assume that ages of the students are variable X and percentages of playing habits are variable Y. Calculation of Karl Pearson's coefficient of correlation /At©00] sctdents| Players K-X | K-? ] Y-¥ fv-1)*] 0) Habits (Y) 15 250 | 200 80 “25 6.25 30 900 -75 16 200 | 150 75 “15 2.25 25 625 37.5 17 150 90 60 0.5 0.25 10 100 5 18 120 48 40 OS 0.25 -10 100 5 19 100 30 30 15 2.25 -20 400 -30 20 80 12 15 2.5 6.25 -35 1225 -87.5 105 300 17.5 3350 -240 rx ry rx2 Zy2 rx Blsizs y= =*P=50 =240_ _ =240 | Vi75-3350 242126 Interpretation: From the above calculation it is very clear that there is high degree of negative correlation i.e. r = -0.9912, between the two variables of age and playing habits. i.e. Playing habits among students decreases when their age increases. Illustration 05: Find Karl Pearson's coefficient of correlation between capital employed and profit obtained from the following data Capital Employed (Rs. In Crore) | 10 | 20 | 30 | 40 | 50 | 60 | 70 | 80 | 90 [100 Profit (Rs. In Crore) 2]4 [8] s [10/15] 14] 20[ 22 | 50 Solution: Let us assume that capital employed is variable X and profit is variable Y.CUB, B.Com 4 Semester Businoss Statistics - I Calculation of Karl Pearson's coefficient of correlation x Y x YF XY 10 2 100 4 20 20 4 400 16 80 30 8 900 64 240 40 5 1600 | 25 200 50 1o | 2500 | 100 | 500 60 15 | 3600 | 225 | 900 70 14_| 4900 | 196 | 980 80 20 | 6400 | 400 | 1600 90 22 | s1oo | 484 | 1980 100 50 | 10000 | 2500 | sooo sso | 150 | 38500 | 4014 | 11500 =x EY yx? yy? EXY Illustration 06: ayXY-EX DY \{(a0-38800)-(5502)] [ (10+4014)-(1502)] (4.15,000) - (82,500) VUEBE.000)=G02,500}] | 40.140}=22.500)] 32500. _ 32500 ¥(@2,500) (47,640) ~ V1455g00000 32500 = Seraeasas ~ 08519 A computer while calculating the correlation coefficient between the variable X and Y obtained the following results: N= 30; yX=120 -YxX’=600 YY=90 yye=250 YXY=335 It was, however, later discovered at the time of checking that it had copied down two pairs of observations as: ®&Y): (8,10) (12,7) While the correct values were: (X,Y) (8,12) (10,8) Obtain the correct value of the correlation coefficient between X and Y. Solution: Correct. YX = 120-8-12+8+10 = 118 Correct YX? = 600 8-12 + B+ 102 = 600-64- 1444644100 = 556 Correct. YY = 90-10-7+12+8 a) Correct = YY? = 250-102 72 + 122+ B = 250-100-49+144+64 = 309 Correct YXY = 335 (8*10) - (12*7) + (8*12) + (10*8) = 335-80-84+96+80 = 347 r AyAY_EXDY 564 564 in(x2) - (£X)2][n(Z¥2) - (2¥)2] (30 +347) - (118-93) [<20-556)-(1182)] | (20+309)-(933)] (10,410) — (10.974) Yiea6,680)—13.924)] | 0270)—(6649)] Ya@7se 2) Vaviia7e 564 13082339 311 Therefore, the correct value of correlation coefficient between X and Y is moderately negative correlation of -0.4311CUB, B.Com 4 Semester Business Statistics - Illustration 07: Coefficient of correlation between X and Y is 0,3. Their covariance is 9. The variance of X is 16. Find the standard devotion of Y series. Solution: Given information: r=03 Cov(XY)=9 Var (X)=16 ___cov0t7) 9 38 © Ywar@ «var (%) 0.3 e+ Var 035 ae fvarw *4-— =-=— = 03%4= sD(Y) 12s spy) 78 Therefore the standard deviation of Y series = o(Y) = 7.5 Illustration 08: Calculate correlation coefficient from the following two-way table, with X representing the average salary of families selected at random in a given area and Y representing the average expenditure on entertainment. Expenditure on Average Salary (Rs.'000) Entertainment (Rs.'000) 100-150 150-200 200-250 250-300 300-350 0-10 5 4 5 2 4 10-20 2 7 3 7 1 20-30 : 6 - 4 5 30-40 8 : 4 - 8 40-50 - 7 3 5 10 Solution: Let us assume that Average Salary is variable X and Expenditure on Entertainment is variable Y. In case of grouped data, we need to follow the assumed mean method to calculate Karl Pearson’s Coefficient of Correlation. Following steps are followed to compute correlation. 1, Identify the mid-point of the class intervals for variable X and Y. 2. Chose an assumed mean from the mid-point identified above for both X and Y. 3, To simplify further, deviation from assumed mean is computed by dividing deviation by a common factor. 4. Add the values in cell, row-wise and column-wise, to compute frequencies (f). Sum of either row-wise or column-wise represent the value of N. 5, Obtain the product of dxand d, and the corresponding frequencies (f) in each cell, Write the figure thus obtained in the right corner of each cell which represent the value of fdxdy.CUB, B.Com 4 Semester Business Statistics - I Calculation of Karl Pearson's coefficient of correlation X | s00- | 150- | 200- | 250- | s00- 150 | 200 | 250 | 300 | 350 f | dy | fay | fay? | fod, Y iid) 42s | 17s | 225 | 275 | 325 2| |e ° 4] jae 0-10) 5 20 | -2 | -40 | 80 | 8 5 4 5 2 4 4 7 ° 7 2 10-20) 15 20 | -1 | -20 | 20 | 2 2 7 3 2 4 ° ° ° ° 20-30 25 15 | 0 | 0 | 0 | 0 : 6 - 4 5 a6 ° 16 30-40 35 20 | 1 | 20 | 20) 0 8 : 4 : 8 | [o] |r| | 40 40-50 | 45 25 | 2 | 50 | 100 | 36 : 7 3 5 10 f 1s | 24 | 15 | 18 | 28 | 100 10 | 220) 46 a 2i| 41/0 1 2 Ded, | rfayz | read, fd, -30 | -24 | 0 | 18 | 56 | 20 | yfa, faz 6o | 24 | o | 18 | 112 | 214 | pfae fad, 8 1 o | a | 38 | 46 | xr, 4d, = Mid Point of Series X - Assumed Mean of Series X = MP(X) - 225 dy = Mid Point of Series Y - Assumed Mean of Series ¥ = MP(Y) - 25 ny faxdy-Yfdx Yfdy (100+46)~ (2010) Zfdx}*][n(Zfdy?) — fay?) {[ntarax?) [200-2149 - c20)2][c100-220) — (4.600) (200) - 4400 = ‘oo ‘Yizia00 - 400][22,000- 100) ~ f2io00}-(21,900) ~ 214452792 ~ 0.2052 Interpretation: From the above calculation it is very clear that there is low degree of positive correlation ic. r = 0.2052, between the two variables of salary and expenditure, It means average salary of income have slightly or low influence over entertainment expenditure.CUB, B.Com 4 Semester Business Statistics - I Spearman's Rank Coefficient of Correlation: When quantification of variables becomes difficult such beauty of female, leadership ability, knowledge of person etc, then this method of rank correlation is useful which was developed by British psychologist Charles Edward Spearman in 1904. In this method ranks are allotted to each element either in ascending or descending order. The correlation coefficient between these allotted two series of ranks is popularly called as “Spearman's Rank Correlation” and denoted by “R”. To find out correlation under this method, the following formula is used. exp? NSN R=1- where, D =Difference of the ranks between paired items in two series. N = Number of pairs of ranks In case of tie in ranks or equal ranks: In some cases it may be possible that it becomes necessary to assign same rank to two or more elements or individual or entries. In such situation, it is customary to give each individual or entry an average rank. For example, if two individuals are ranked equal to 5® place, then both of them are allotted with common rank (5+6)/2 = 5.5 and if three are ranked in 5" place, then they are given the rank of (5+6+7)/3 = 6. It means where two or more individuals are to be ranked equal, the rank assigned for the purpose of calculating coefficient of correlation is the average of the ranks with these individual or items or entries would have got had they differed slightly with each other. Where equal ranks are assigned to some entries, an adjustment factor is to be added to the value of 6D? in the above formula for calculating the rank coefficient correlation. This adjustment factor is to be added for every repetition of rank. 1 Adjustment factor = 4(m:+m;) where, m = number of items whose rank are common rr For example, if a particular rank repeated two times then m=2 and if it repeats three times then m= 3 and so on. Hence the above formula can be re-written as follows: 6 typ Am?) 2 (02am) + 200? pen — SDB aeCmP am) lm) + Pm +d NEON Illustration 09: Find out spearman’s coefficient of correlation between the two kinds of assessment of graduate students’ performance in a college. Name of students A B Cc D E FE G H I Internal Exam 51 | 68 | 73 | 46 | 50 | 65 | 47 | 38 | 60 External Exam 49 72 74 44 58 66 50 30 35,CUB, B.Com 4 Semester Business Statistics - I Solution: Calculation of Spearman’s Rank Coefficient of Correlation Name | "EAT | Ranks (Ri) | Pel | Ranks (Ri) | D=Ri- Re Db A 31 5 49 6 a I B 68 2 72 2 oO 0 Cc 73 1 74 1 O 0 D 46 8 44 7 1 1 E 50 6 58 4 2 4 F 65 3 66 3 o 0 G AT 7 50 5 2 4 i 36 9 30 9 oO 0 1 60 4 35 8 # 16 DDe= 26 1 OUD _ 4 6126 _ 156 56 _ Ra 1-2 1-27 = 128 288 21 -0,2167 = 0.7833 Interpretation: From the above calculation it is very clear that there is high degree of positive correlation i.e. R = 0.7833, between two exams. It means there is a high degree of positive correlation between the internal exam and external exam of the students. Illustration 10: The coefficient of rank correlation of the marks obtained by 10 students in statistics and accountancy was found to be 0.8. It was later discovered that the difference in ranks in the two subjects obtained by one of the students was wrongly taken as 7 instead of 9, Find the correct coefficient of rank correlation. Solution: R=1-2%., 9, a ee? - 1.0.8 => NON 308-10 990 990 an 0.2 6YD2= 0.27990 => YD2=198/6 => y:D2-33 But this is not correct YD? therefore we need to compute correct value Correct YD? = 33 - 72+ 92= 65 Hence, correct value of rank coefficient of correlation is: xD? _, 6165 _, 390 «8% 21-882 1-2-1 - 0394 = 0.606 R= IMlustration 11: Ten competitors in a beauty contest are ranked by three judges in the following order: 15*Judge 1 6 5 10 3 2 4 9 7 8 2nd Judge 3 5 8 4 7 to | 2 1 6 9 34 Judge 6 4 9 8 1 2 3 10 [5 7CUB, B.Com 4 Semester Business Statistics - I Use the rank correlation coefficient to determine which pairs of judges has the nearest approach to common tastes in beauty. Solution: In order to find out which pair of judges has the nearest approach to common tastes in beauty, we compare rank correlation between the judgements of 1, 1s Judge and 24 Judge 2, 24 Judge and 34 Judge 3. 1 Judge and 3" Judge Calculation of Spearman's Rank Coefficient of Correlation Rank by 1* | Rankby2™ | Rankby3™ |), _ . eR? ec RoR? Fudge (Ra) | judge (Re) | judge (fay | _D2=(RRa} D?= (Re-Ra} Dz= (Ri-Ro) 1 3 6 4 9 25 6 5 4 1 1 4 5 8 9 9 1 16 10 4 8 36 16 4 3 7 1 16 36 4 2 10 2 64 64 0 4 2 3 4 1 1 9 1 10 64 81 1 7 6 S 1 1 4 8 9 7 1 4 1 N=10 N=10 N=10 yD? =200 YD? = 214 YD? = 60 1. AstJudge and 2n4 Judge: R= 1 -S2°> = 4 - S202 4 -1.2121 0.2121 2. 2nd Judge and 34 Judge: R= 1-22 a =1-1297= stJudge and 3" Judge: R=1- 2222 - 360 ae - 3. 1stJudge and 3° Judge: R= 1-3°— = 3° = 1- 0.3636 = 0.6364 Interpretation: From the above calculation it can be observed that coefficient of correlation is positive in the judgement of the first and third judges. Therefore, it can be concluded that first and third judges have the nearest approach to common tastes in beauty. Mlustration 12: From the following data, compute the rank correlation. x 82 68 75 61 68 73 85 68 Y 81 71 71 68 62 69 80 70 Solution: In the problem we find there are repetitions of ranks. Value of X = 68 repeated 3 times and Value of Y = 71 repeated 2 times. Therefore we need to compute adjustment factor to be added to the value of [D2CUB, B.Com 4 Semester Business Statistics - I Calculation of Spearman's Rank Coefficient of Correlation x Y Ri Ra = Ri-Rz D 82 81 2 1 1 1 68 71 6 35 25 6.25 75 71 3 35 -0.5 0.25 61 68 8 7 1 1 68 62 6 8 =2 4 73 69 4 6 -2 4 85 80 1 2 =1 1 68 70 6 5 1 1 pp? 18.5) R= When value X repeated three times, m=3, 1 = 433-3) =4*(27-3)=4*24= Adjustment factor (1) = (33-3) =<5 * (27-3) =5*24=2 When value Y repeated two times, m=2, = 1993.2) =2*(9.2)22*6= Adjustment factor (2) = £(22-2) = (8-2)=*6=05 6+ [185 +240. 6-21 ee sa-@ Rel - 0.25 = 0.75 Spearman's Rank Coefficient of Correlation = 0.75, which indicates there is high degree of positive correlation Properties of Coefficient of Correlation: 1. The coefficient of correlation always lies between - 1 to +1, symbolically it can written as-1 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= r= v0.8 * 0.4 = 0.566 which less than 0.6 Regression coefficients are independent of change of origin but not scale Mlustration 01: Find the two regression equation of X on Y and Y on X from the following data Xo: 10 12 16 11 15 14 20 22 Yo: 15 18 23 14 20 17 25 28 Solution: Calculation of Regression Equation x Y x? y* XY 10 15 100 225 150 12 18 144 324 216 16 23 256 529 368 1 14 121 196 154 15 20 225 400 300 14 17 196 289 238 20 25 400 625 500 22 28 484 784 616 120 160 1,926 3,372 2,542 =x xy =x? xy? =x Here N = Number of elements in either series X or series Y= 8 Now we will proceed to compute regression equations using normal equations. Regression equation ofXonY: X=a+bY ‘The two normal equations are: DX = NatbyY DXY = aby+byy Substituting the values in above normal equations, we getCUB, B.Com 4 Semester Businoss Statistics - I 120 Ba + 160b saw (i) 2542 160a + —-3372b sew (ii) Let us solve these equations (i) and (ii) by simultaneous equation method Multiply equation (i) by 20 we get 2400 = 160a + 3200b Now rewriting these equations: 2400 = 16a + 3200b 2542 an + 3372b -142 -172b Therefore now we have -142 = -172b, this can rewritten as 172b = 142 Now, b = + = 0.8256 (rounded off) Substituting the value of b in equation (i), we get 120 = Ba + (160 * 0.8256) 120 = 8a + 132 (rounded off) 8a 120 - 132 Ba -12 a -12/8 a 15 Thus we got the values of a = -1.5 and b = 0.8256 Hence the required regression equation of X on Y: Xsat+bY => X=-1.5 + 0.8256Y Regression equation of Y on X: Y=a+bX ‘The two normal equations are: YY = Nat+byx XY aX + DEX? Substituting the values in above normal equations, we get 160 = 8a + 120b saw (iii) 2542 = 120a + 1926b wee (iv) Let us solve these equations (iii) and (iv) by simultaneous equation method Multiply equation (iii) by 15 we get 2400 = 120a + 1800b Now rewriting these equations: 2400 = we + 1800b 2542 = 0a + — 1926b o £1 £1 -142 -126b Therefore now we have -142 = -126b, this can rewritten as 126b = 142 Now, b = 1.127 (rounded off) Substituting the value of b in equation (iii), we get 160 = 8a + (120*1127) 160 = 8a + 135.24CUB, B.Com 4 Semester Business Statistics - I 8a 160 - 135.24 Ba 24.76 a 24.76/8 a 3.095 Thus we got the values of a = 3.095 and b = 1.127 Hence the required regression equation of Y on X: Y=a+bX => Y=3,095+1.127X Ilustration 02: After investigation it has been found the demand for automobiles in a city depends mainly, if not entirely, upon the number of families residing in that city. Below are the given figures for the sales of automobiles in the five cities for the year 2019 and the number of families residing in those cities. Cit No. of Families (in lakhs): X__| Sale of automobiles (in 000): Y Belagavi 70 25.2 Bangalore 75 28.6 Hubli 80 30.2 Kalaburagi 60 22.3 Mangalore | 90 35.4 Fit a linear regression equation of Y on X by the least square method and estimate the sales for the year 2020 for the city Belagavi which is estimated to have 100 lakh families assuming that the same relationship holds true. Solution: Calculation of Regression Equation City x Y x? XY Belagavi 70 25.2 4900 1764 Bangalore 75 28.6 5625 2145 Hubli 80 30.2 6400 2416 Kalaburagi 60 223 3600 1338 Mangalore 90 35.4 8100 3186 375 141.7 28,625 10,849 2X ZY 5x? =X¥ Regression equation of ¥ on X: The two normal equations are: zy Na +bDX DXY aX + BEX? Y=a+bX Substituting the values in above normal equations, we get 141.7 = 10849= Sa + 375b 375a + 28625b aw (ii) Let us solve these equations (i) and (ii) by simultaneous equation method Multiply equation (i) by 75 we g et. 10627.5 = 375a + 28125bCUB, B.Com 4 Semester Businoss Statistics - I Now rewriting these equations: 106275 = 37a + 28125b 10849 Sa + 28625b -2215 = -500b Therefore now we have -221.5 = -500b, this can rewritten as 500b = 221.5 Now, b==5= 0,443 500 Substituting the value of b in equation (i), we get w17= $a + (375 *0,443) 141.7 Sa + 166.125 Sa = 141.7- 166,125 5a “24.425 a -24.425/5 a -4.885 ‘Thus we got the values of a = -4.885 and b = 0.443 Hence, the required regression equation of Y on X: Y=a+bX => Y=-4.885 + 0.443X Estimated sales of automobiles (¥) in city Belagavi for the year 2020, where number of families (X) are 100(in lakhs): Y= -4.885 + 0.443X Y = -4.885 + (0.443 * 100) Y=-4.885 + 44.3 Y = 39.415 ('000) Means sales of automobiles would be 39,415 when number of families are 100,00,000 Mlustration 03: From the following data obtain the two regression lines: Capital Employed (Rs.inlakh): 7 8 5 9 12 9 10 15 Sales Volume (Rs. in lakh) 4 5 2 6 9 5 7 12 Solution: Calculation of Regression Equation x Y x? y? XY 7 4 49 16 28 8 5 64 25 40 5 2 25 4 10 9 6 a1 36 54 12 9 144 a1 108 9 5 al 25 45 10 7 100 49 70 15 12 225 144 180 7s 50 769 380 535 3X xy x? v2 EXYCUB, B.Com 4 Semester Regression line/equation of X on Y: (X-X) = by (¥- ¥) y= Regression coefficient of X on Y: Day = DXEXEY »y = apy? (ayy? Dy = £22585) 075450) y= e380) - (50)? _ 4280-3750 * 3040-2500 530 = © = 0.9815 (X-X) = by (Y-¥) 0.9815 (Y - 6.25) 0.9815Y - 6.1344 X= 9.375 - 6.1344 + 0.9815Y Businoss Statistics - I Regression line/equation of Y on X: (Y-¥) =byx (X-X) xa 375 ye = 6.25 Regression coefficient of Y on X: _ BEXY- DXEY bye = ame 00? Dy = {225859= 75450) ey = (95769) - (78)? _ #280 - 3750 * 6152-5625 530 = So = 1.0057 (Y-Y¥) = by (X-X) Y - 6.25 = 1.0057 (X - 9.375) Y - 6.25 = 1.0057X - 9.4284) Y= 6.25 - 9.4284 + 1.0057X 2aaqg gaagqg X= 3.2406 + 0.9815Y Y = -3.1784 + 1.0057X Ilustration 04: From the following information find regression equations and estimate the production when the capacity utilisation is 70%. Average (Mean) Standard Deviation Production (in lakh units) 42 125 Capacity Utilisation (%) 88 85 Correlation Coefficient (r) 0.72 Solution: Let production be variable X and capacity utilisation be variable Y. Regression equation of production based on based on capacity utilisation shall be given by X on Y and regression equation of capacity utilisation of production shall be given by Y on X, which can be computed as given below: Given Information: X = 42 Y=88 0x = 12.5 oy=8.5 r Regression coefficient of X on Y: ox 2s by == = 0.72" 5 = 1.0588 72 Regression coefficient of Y on X: by=rS = 0.72% = = 04896 Regression Equation of Y on X: (Y-Y) = by (X-X) > Y- 88 = 0.4896 (X- 42) > Y= 88 - 20.5632 + 0.4896X > Y= 67.4368 + 0.4896X 85 Regression Equation of X on Y: (X-X) =by (Y-¥) > X-42= 1.0588 (Y - 88) > X=42- 93.1744 + 10588Y => X=-51,1744 + 1,0588YCUB, B.Com 4 Semester Businoss Statistics - I Estimation of the production when the capacity utilisation is 70% is regression equation X on Y, where Y = 70 Regression Equation of X on Y: (-X)=by (Y-1) X=-51.1744 + 1.0588Y = -51.1744 + (1.0588 * 70) = 51.1744 + 74.116 = 22.9416 Therefore, the estimated production would be 22,94,160 units when there is a capacity utilisation of 70%. Illustration 05: The following data gives the age and blood pressure (BP) of 10 sports persons. Name A B Cc D E F G H I J Age (X) 4236 55 58 35 65 60 50 48 51 BP (Y) 98 93 110 85 105 108 82 102 118 99 i, Find regression equation of Y on X and X on Y (Use the method of deviation from arithmetic mean) ii, Find the correlation coefficient (r) using the regression coefficients. iii, Estimate the blood pressure of a sports person whose age is 45. Solution: Calculation of Regression Equation Name| Age (X) | BP (Y) x y xy A 42 98 64 4 16 B 36 93 196 49 98 c 55 110 25 100 50 D 58 85 64 225 -120 E 35 105 225 25 “78 F 65 108 225 64 120 G 60 82 100 324 -180 H 50 102 0 2 0 4 0 I 48 118 2 18 4 324 -36 J 51 99 1 “1 1 1 1 500 1,000 0 0 904 1120 | -128 3x xy 3x Ly. xx? xy xy Regression coefficients can be computed using the following formula: by == by = where x =X-Xandy=Y-¥CUB, B.Com 4 Semester Regression coefficient of X on Y: Regression equation of X on Y: (K-X)=by (Y-¥) > X-50=-0.1143 (Y- 100) > X-50=-0.1143Y +1143 > X=50+1143-0.1143Y > X= 6143 -0.1143Y Businoss Statistics - I Regression coefficient of ¥ on X: 2B aL by = BE = SE = 0.1416 Regression equation of Y on X: (Y-¥) = by (X-X) > Y- 100 =-0.1416 (X - 50) > Y- 100 =-0.1416X + 7.08 > Y= 100 + 7.08 - 0.1416x > Y= 107.08 - 0,1416X Computation of coefficient of correlation using regression coefficient: r= \/bxy « byx = - 0.1143 0.1416 = - V0.01618488 = - 0.1272 Therefore, we have low degree of negative correlation between age and blood pressure of sports person. Estimation of the blood pressure (Y) of a sports person whose age is X=45 can be calculated using regression equation Y on X: Regression equation of Y on X: (¥-¥) = byx (X-X) > Y=107.08 - 0.1416X = 107.08 - (0.1416 * 45) = 107.08 - 6.372 = 100,708 It means estimated blood pressure of a sports person is 101 (rounded off) whose age is 45. Illustration 06: There are two series of index numbers, P for price index and S for stock of commodity. ‘The mean and standard deviation of P are 100 and 8 and S are 103 and 4 respectively, The correlation coefficient between the two series is 0.4. With these data, work out a linear equation to read off values of P for various values of $. Can the same equation be used to read off values of $ for various values of P? Solution: Let us assume that P=Price Index be variable X an S=Stock of Commodity be variable Y. Linear equation to read off values of P for various values of $ would be regression equation of X on Y. Regression coefficient is to be computed using mean and standard deviation. From the problem we can list out the given information: X=100 Y=103 Ox=8 oy=4 r=04 Regression equation of X on Y: (K-X)=by (¥-¥) > K-X=rZ (v-¥Y)CUB, B.Com 4 Semester Businoss Statistics - I © (X~ 100) = (0.4 «*) (¥ - 103) > (X- 100) = 0.8 (Y - 103) > (X- 100) =08Y-824 > X = 100-82.4+0.8Y > X= 17.6+08Y Linear equation to read off values of P for various values of Sis X = 17.6 + 0.8Y To read off values of S for various values of P we need regression equation of Y on X and therefore above linear equation cannot be used. Hence, the following regression equation of Y on X be computed: (Y-Y) = by (X-%) > W-Y=r2 (-X) (Y- 103) =0.4* ‘ (X- 100) (¥- 103) = 0.2 (X- 100) Y-103 = 0.2X- 20 Y= 103 - 20 + 0,2X > Y=83+02X Hence, the linear equation to read off values of S for various values of Pis Y = 83 + 0.2X 2 & ° 2 Ret -w of Correlation and Regression Analysis: In correlation analysis, when we are keen to know whether two variables under study are associated or correlated and if correlated what is the strength of correlation ‘The best measure of correlation is proved by Karl Pearson's Coefficient of Correlation. However, one severe limitation of this method is that it is applicable only in case of a linear relationship between two variables. say X and Y are independent or not correlated then the result of correlation coefficient is zero. Correlation coefficient measuring a linear relationship between the two variables indicates the amount of variation one variable accounted for by the other variable. A better measure for this purpose is provided by the square of the correlation coefficient, known as “coefficient of determination’. This can be interpreted as the ratio between the explained variance to total variance: “_ Explained variance If two variables re = ASS TS ‘Similarly, Coefficient of non-determination = (1 -r) Regression analysis is concerned with establishing a functional relationship between two variables and using this relationship for making future projection, This can be applied, unlike correlation for any type of relationship linear as well as curvilinear. The two lines of regression coincide i.e. become identical when r= -1 or +1 in other words, there is a perfect negative or positive correlation between the two variables under discussion if r = 0, then regression lines are perpendicular to each other. eee