Correlation is a statistical measure that indicates the extent to

which two or more variables fluctuate together.

A positive correlation indicates the extent to which those

variables increase or decrease in parallel; a negative
correlation indicates the extent to which one variable
increases as the other decreases.

.
Some common applications of correlation analysis in
business and social sciences:

Production : The production department wants to know

if the number of defective items produced has
anything to do with the age of the machine.

Human Resource : The HR department wants to know

if the productivity of its workers decreases with the
number of hours they put in.
 A Statistical technique that is used to analyze the strength and
direction of the relationship between two quantitative variable is
called Co relational analysis.

 Two variables are said to be in correlation if the change in one of the

variable results in a change in other variable.

E g :- 1) Frequency of smoking and lungs damage ,

2) Sales revenue and expenses incurred on
advertising.
A ‘positive correlation’ exists where the high values of one
variable are associated with the high values of the other
variable(s).

A 'negative correlation' means association of high values of

one with the low values of the other(s).

Correlation can vary from +1 to -1.

Values close to +1 indicate a high-degree of positive

correlation, and values close to -1 indicate a high degree of
negative correlation.
 Positive and Negative
 Linear and Non-linear
 Simple, Partial and Multiple
 POSITIVE CORRELATION NEGATIVE CORRELATION

 If the variables vary in same  If both variables vary in the

direction, correlation is said opposite direction, correlation
to be POSITIVE. is said to be NEGATIVE.

 If one variable increases, the  If one variable increases and

other also increases on the the other decreases, or one
other hand, if one variable decreases the other increases.
decreases, the other also
decreases.
 NON-LINEAR
LINEAR CORRELATION CORRELATION

• If the extent of change in • If the extent of change in

one variable tends to have a one variable tends to have
constant ratio in the extent no consistent ratio in the
of change in another extent of change in another
variable, then the variable, then the
correlation is said to be correlation is said to be
LINEAR. NON-LINEAR.
 When only two variables are involved, it is simple
correlation
 When three or more than three variables are involved,
we can compute either partial or multiple correlation
 Methods of
Correlation

Graphic Algebraic

1. Karl pearson
2. Rank method
Scatter diagram
 Scatter diagram is a graph or chart which helps to
determine whether there is a relationship between two
variables by examining the graph of the observed data.

A scattered diagram can give us two types of

information:
• Pattern that indicate that the variables are related.
• If the variables are related, what kind of line or
estimating equation, describes this relationship.
 Merits:
 It is a simple and Non mathematical
technique for studying correlation. It is very
easy to get a rough estimate of whether the
variables are related or no.
 Demerits:
 We can get an idea about the direction of the
correlation and also know if it is high or low
but exact degree of correlation cannot be
identified.
 Karl Pearson’s Coefficient of Correlation denoted by-
‘r’ The coefficient of correlation ‘r’ measure the degree
of linear relationship between two variables say x & y.

r= N Σdxdy - Σdx Σdy

√N Σdx²-(Σdx)²√N Σdy²-(Σdy)²
 Interpretation of Correlation Coefficient (r)

The value of correlation coefficient ‘r’ ranges from

-1 to +1

If r = +1, then the correlation between the two

variables is said to be perfect and positive

If r = -1, then the correlation between the two

variables is said to be perfect and negative

If r = 0, then there exists no correlation between

the variables
1. There is a linear relationship between the
variables
2. The two variables under study are affected
by a large number of independent causes
3. There is a cause and effect relationship
between the forces affecting the distribution
of the items in the two series
 Merits:
 1.Not only does it give the correlation
between the two variables but also tells
whether it is positive or negative
 Demerits:
 1.The correlation coefficient always assumes
a linear relationship regardless of the fact
whether the assumption is true or not
This method is useful when quantitative measure of
certain factors cannot be fixed but individuals can be
arranged in an order , giving rank to each individual.
It is very useful where data is of qualitative nature like
honesty, efficiency , intelligence etc.
Rather, it is the only method that can be used when we are
given ranks and not actual data.
It is defined as:
1. This method cannot be used for finding
correlation in a grouped frequency
distribution
2. When the number of observations exceed
30, it becomes very tedious to convert
actual values into ranks.
1.A study on correlation between Market Research initiatives & Consumer
Spending:
The relationship between market research and consumer spending relies on how
well you use the results of your research. Market research is what you do to find
out what kinds of customers are drawn to your products or service, how they use
your brand and why they use it.

2. To study the correlation between customer satisfaction and promotional

activities initiated by an organisation

3. To study the correlation between time spent on marketing the business and
increase in the customer base of the firm.
1. Manyeconomists have discovered that people tend to buy more cars and appliances
during economic booms.

2. One could expect a positive correlation between, say, the employment rate and
auto stocks. In other words, when employment rates are up, auto
stocks will probably rise across the board.

3. If an investor can find an investment that consistently goes in the same direction as
another investment, then holding both investments can dramatically increase
returns. This approach can also dramatically increase losses, which is why some
investors try to find assets that are negatively correlated. That is, when
one asset decreases in value, the other rises in value (this is the idea behind
hedging).
 Accordingly, positive correlation can be one way to increase the risk in a portfolio
(and negative correlation is a way to reduce risk).
 It is very important to remember, however, that correlation does
not mean causation. In other words, just because two things are positively
correlated does not mean that one is causing the other to go in the same direction.
Additionally, negative or positive correlation between two variables does not exist
under every circumstance.
 1. To study the correlation between HR Technology
and Organization Performance.

2. To study the correlation between the knowledge of

the employees and sales of the organisation
1. A study on consumer ethnocentrism and preference for foreign
products in India
 To study the relationship between patriotism and consumer ethnocentric
tendency
 To study the relationship between cultural openness and consumer
ethnocentric tendency

2 . Impact of Global Human Resource Management Practices on

Turnover and Productivity
 To study the relationship between organisational culture, customer
satisfaction and organisational performance

3. A study of risks and benefits of an International Joint Venture w.r.t.

Tata Starbucks
1. In the social sciences, there is rarely a perfect correlation. A perfect
correlation means simultaneous and equivalent changes are seen when a
variable is altered. Behaviours and real life are so complicated that you
rarely see a perfect correlation. There will be something running
interference.
2. Causation - Correlation does not equal causation.
 Experiments are typically designed to demonstrate that variable A
causes something in variable B.
 A problem with correlation is that the variables you are interested in
are merely interacting with each other. They are not necessarily
causing one another. So whenever you are using a correlation, it is
inaccurate to say variable A causes variable B. All you can say with
a correlation is that variable A interacts with variable B.
Third-variable problem- the correlation in variables may occur
because both variables are related to a third variable
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.

However, correlation does not imply causation.

There may be, for example, an unknown factor that influences both variables
similarly.

Here’s one example: A number of studies report a positive correlation between

the amount of television children watch and the likelihood that they will
become bullies. Media coverage often cites such studies to suggest that
watching a lot of television causes children to become bullies. However, the
studies only report a correlation, not causation. It is likely that some other
factor – such as a lack of parental supervision – may be the influential factor.