Business Statistics For Dummies, 2nd Edition

Chapter 5

Measuring How Data Sets Are Related to Each Other

IN THIS CHAPTER

Working with measures of association: covariance and correlation

Determining the correlation coefficient

Ameasure of association is a numerical value that reflects the tendency of two variables to move in the same direction or in opposite directions. For example, it makes sense that corporate profits and sales would both tend to increase when the economy is strong and decrease when the economy is weak. A measure of association is used to assign a numerical value to the strength and direction of this type of relationship.

The two most widely used measures of association are known as covariance and correlation. Measures of association can help answer questions such as “Do stock prices tend to rise during a period of falling interest rates?” and “Does the unemployment rate tend to increase during periods of rising oil prices?”

In this chapter, you see formulas for computing covariance and correlation for both samples and populations. The relationship between two variables is illustrated with a type of graph known as a scatter plot, which is useful for seeing the relationship that exists (if any) between two variables. (I cover several types of graphs such as the scatter plot in Chapter 2.) This chapter concludes ...