Notes

Correlation coefficient

• Correlation adjusts covariance, so that the relationship between the two variables becomes easy and intuitive to interpret.
• Formula for correlation coefficient: The Covariance divided by the product of the standard deviations of the two variables.
• 1 ≤ correlation coefficient ≥ 1
• Correlation of 1
  • Perfect Positive Correlation
  • The entire variability of one variable is explained by the other.
• Correlation of 0
  • Absolutely independent variables
  • Nothing in common
• Negative Correlation
  • Perfect negative correlation of -1
  • Imperfect negative correlation: (-1,0)
• Correlation of Variable X and Y = Correlation of Variable Y and X
• Formula is symmetrical with respect to both variables

Causality

• Important to understand the direction of causal relationships

Correlation does not imply causation!

Course Materials

2.12.+Correlation_lesson.xlsx