What is the Correlation Coefficient ?

There are 2 problems with using the covariance but these can be solved by using what is called the correlation coefficient.
This can be solved by modifying the formula slightly.
This is obtained by dividing the covariance of the two variables by the product of the standard deviation of both variables.

The correlation coefficient is a numebr between -1 and 1

This modified formula is called the Correlation Coefficient between two variables.

How to Calculate the Coefficient ?

There are a few methods available for calculating the correlation coefficient.

  • Spearmans

  • Pearson

Which method you choose will depend on the type of relationship between the two variables.
You should always plot a scattergram first to quickly identify the type of relationship

The correlation coefficient normalises the covariance to the product of the standard deviations of the variables

This identifies a linear correlation ??

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