Linear correlation

Definition

Linear correlation measures the strength and direction of a linear relationship between two variables. It is represented by the correlation coefficient, which ranges from -1 to 1.

5 Must Know Facts For Your Next Test

1. A correlation coefficient of +1 indicates a perfect positive linear relationship.
2. A correlation coefficient of -1 indicates a perfect negative linear relationship.
3. A correlation coefficient close to 0 suggests no linear relationship between the variables.
4. Linear correlation does not imply causation between the variables.
5. The Pearson correlation coefficient is commonly used to measure linear correlation.

Review Questions

• What does a correlation coefficient of 0 mean?
• How do you interpret a negative correlation coefficient in finance?
• Why doesn't linear correlation imply causation?

Related terms

Regression Analysis: A statistical method for modeling the relationship between a dependent variable and one or more independent variables.

Pearson Correlation Coefficient: A measure of the linear correlation between two variables, ranging from -1 to +1.

Scatter Plot: A graphical representation showing the relationship between two variables using Cartesian coordinates.