Paper 4: Fundamentals of Business Mathematics & Statistic

FUNDAMENTALS OF BUSINESS MATHEMATICS AND STATISTICS I 6.3

6.1.7. Measurement of Correlation

The correlation can be measured by any of the following methods-

1. Scatter Diagram


2. Karl Pearson’s coefficient of correlation


3. Rank correlation coefficient

6.1.8. Scatter Diagram Method
The scatter diagram represents graphically the relation between two variables Xand Y. For each pair of
Xand Y, one dot is put and we get as many points on the graph as the number of observations. Degree of
correlation between the variables can be estimated by examining the shape of the plotted dots.
Following are some scattered diagrams showing varied degrees of correlation.

Low degree of positive correlation; r> 1 Low degree of negative correlation; r< 1

Perfect positive correlation; r = 1 Perfect negative correlation; r = -1