Correlation coefficient (r)
Correlation coefficient measures the degree of association between two variables such as the cost and the activity level.
r = nΣxy - Σx Σy
[nΣx2 – (Σx)2 ] [nΣy2 - (Σy)2]
When the degree of association among the two variables is very close then it would be almost possible to plot the observation on a straight line and r will be almost equal to one.
-1≤ r ≤ 1
If r= -1, then the two variables are said to be perfectly negatively correlated
If r = +1, then the two variables are perfectly positively correlated
If r = 0, then there is no correlation between the two variables.