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Negative correlation can be described by the correlation coefficientCorrelation Coefficient, sometimes known as cross-correlation coefficient, is a statistical measure used to evaluate the strength of a relationship between 2 variables. Its values range from -1.0 (negative correlation) to +1.0 (positive correlation). read more when the value of this correlation is between 0 and -1. The amount of a perfect negative correlation is -1. The strength of the correlation between the variables can vary. For example, suppose two variables, x and y, correlate -0.8. It means as x increases by 1 unit, y will decrease by 0.8. Now, consider that the negative correlation between these variables is -0.1. In this case, every unit change in the value of the x variable will result in a difference of 0.1 unit only in the cost of variable y. Understanding Negative CorrelationTo understand the negative correlation better, we need to have a basic understanding of correlation. CorrelationCORREL function is a statistical function in Excel. The CORREL formula finds out the coefficient between two variables and returns the coefficient of array1 and array2. The correlation coefficient determines the relationship between the two properties.read more is a statistical tool that is a measure of the degree of relation between two different functions. For example, the weight and height of a person. Generally, as the height increases, the person’s value also increases. Therefore, it indicates a positive correlation between height and weight because as one variable increases, other variables also increase. But, the correlation is negative if the two variables move in opposite directions—for example, height from the seal level and temperature. As the height increases, the temperature decreases. The formula gives correlation: Here,
Rearranging gives us this formula: Correlation can take any value between -1 to 1. The negative sign indicates a negative correlation, while the positive sign indicates a positive correlation. Zero correlation means that there is no relationship between the two variables. You are free to use this image on your website, templates, etc., Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Negative Correlation (wallstreetmojo.com) Why Negative Correlation Matters?
Real-Life Examples of Negative CorrelationPractical Example of Negative CorrelationSuppose two stocks have provided the following returns annually in the period 2011-16:
Considering the stock returns of the first stock as variable ‘x’ and that of second stock as ‘y.’ Calculation of variable xy Calculation of variable X2 Calculation of variable Y2 Sum Calculation of Correlation coefficientCorrelation Coefficient, sometimes known as cross-correlation coefficient, is a statistical measure used to evaluate the strength of a relationship between 2 variables. Its values range from -1.0 (negative correlation) to +1.0 (positive correlation). read more (r)
Refer to the Excel sheet given above for detailed calculations. The negative value of the correlation coefficient shows that the variables are negatively correlated. ConclusionAt times, other factors may cause the variables to behave in a particular manner. In the example discussed above, one can deduce that when x increases, y decreases. But it would be wrong to suppose that the rise in ‘x’ is causing the ‘y’ to decrease because both companies may be involved in entirely different businesses and impacted by different economic conditions. Thus, one should use the correlations only to determine a cause. The executives can use it to understand the relationship between variables, such as market demand and consumer spending, that already exists as part of the analysis. But one should not use it to investigate the change in one variable due to other variables because multiple factors will always impact that relationship. For example, consumer spending in the market and the revenue of an FMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more company. They may show a positive correlation, but that company’s revenue may increase because of some other reason, like the launch of a new product or expansion into an emerging economy. Recommended ArticlesThis article is a guide to Negative Correlation and its definition. Here, we discuss how to interpret negative correlation, practical examples, and its usage in real life. You can learn more from the following statistics articles: – |