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Question

Consider 62 pair of observations $(x_i, y_i)$, i = 1, …., 62, obtained from the distribution of $(X, Y)$. The Pearson correlation coefficient ($R$) of these observations is 0.27.

Which one of the following statements is CORRECT for a significance level $\alpha = 0.05$ and $t_{0.025,60} = 2.0$?

Hint: Test statistic $t = \frac{R\sqrt{n - 2}}{\sqrt{1 - R^2}}$

The correct answer is
$X$ and $Y$ are significantly linearly correlated

The question asks to determine if the linear correlation between $X$ and $Y$ is statistically significant given a sample size, the Pearson correlation coefficient ($R$), a significance level ($\alpha$), and a critical value.

Hypothesis Testing for Correlation

We perform a hypothesis test to check for significant linear correlation. The hypotheses are:

  • Null Hypothesis ($H_0$): There is no linear correlation between $X$ and $Y$ (i.e., $\rho = 0$).
  • Alternative Hypothesis ($H_a$): There is a linear correlation between $X$ and $Y$ (i.e., $\rho \neq 0$).

Calculating the Test Statistic

Given:

  • Number of observations, $n = 62$
  • Pearson correlation coefficient, $R = 0.27$
  • Significance level, $\alpha = 0.05$
  • Critical t-value, $t_{\alpha/2, n-2} = t_{0.025, 60} = 2.0$

The test statistic formula is provided:

$ t = \frac{R\sqrt{n - 2}}{\sqrt{1 - R^2}} $

Substitute the given values:

$ t = \frac{0.27\sqrt{62 - 2}}{\sqrt{1 - (0.27)^2}} $

$ t = \frac{0.27\sqrt{60}}{\sqrt{1 - 0.0729}} $

$ t = \frac{0.27 \times 7.745966...}{\sqrt{0.9271}} $

$ t = \frac{2.091411...}{0.962860...} $

$ t \approx 2.172 $

Comparing Test Statistic with Critical Value

We compare the absolute value of the calculated t-statistic with the critical t-value:

  • Calculated t-statistic: $|t| \approx 2.172$
  • Critical t-value: $t_{0.025, 60} = 2.0$

Since $|2.172| > 2.0$, the calculated test statistic falls in the rejection region.

Conclusion

We reject the null hypothesis ($H_0$). This indicates that there is sufficient statistical evidence to conclude that a linear correlation exists between $X$ and $Y$ at the $\alpha = 0.05$ significance level.

Therefore, $X$ and $Y$ are significantly linearly correlated.

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Important Questions from Correlation Analysis

  1. If X ∼ N (0, 1) and Y = X2 then the correlation coefficient r (X, Y) is

  2. Given below are two statements: One is labelled as Assertion (A) and the other is labelled as Reason (R).

    Assertion (A): If the securities with less than perfect negative correlation between their price movements are combined, portfolio risk can be reduced significantly.

    Reason (R): The term with negative correlation has the effect of reducing the computed value of total portfolio risk, given other terms that are positive.

    In the light of the above statements, choose the most appropriate answer from the options given below:

  3. The two-regression equation of variable \(\rm{x}\) and \(\rm{y}\)  are

    \(\rm{y = 0.8x + 9.8}\) and \(\rm{x = 10.2 + 0.6y}\)

    The coefficient of correlation between \(\rm{x}\) and \(\rm{y}\) is

  4. Let $X$ be a random variable that follows $Uniform(-1, 1)$ distribution. The conditional distribution of the random variable $Y$ given $X = x$ is the $Uniform(x^2 - 0.1, x^2 + 0.1)$ distribution.

    The value of $correlation(X, Y)$ is __________ . (Answer in integer)
  5. In the variance-covariance matrix given below, which one of the following pairs of elements has the highest correlation?

    $$ \begin{bmatrix} & P & Q & R & S \\ P & 0 & 0 & 0 & 0 \\ Q & 0 & 3.73 & 1.85 & 3.23 \\ R & 0 & 1.85 & 0.93 & 1.61 \\ S & 0 & 3.23 & 1.61 & 2.79 \end{bmatrix} $$
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