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    Lect12 13

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    Lect12 13

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    4 views28 pages

    Lect12 13

    Uploaded by

    killerbhanutejgamez

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    LEC12

    3 types of “ co-varying” :
    3 types of “ co-varying” :
    3 types of “ co-varying” :

    •
    Correlation
    • Covariance is a measure to indicate the extent to which
    two random variables change simultaneously.
    • Correlation is a measure used to represent how strongly
    two random variables are related to each other.
    • Ultimately, correlation is the scaled form of covariance.
    All the formulas of Correlation
    coefficient
    Covariance

    Populatio
    n
    Covarian
    ce
    formula

    Sample
    Covarian
    ce
    formula
    Problem. Compute correlation coefficient
    between X and Y.
    Solution.
    X Y XY X2 Y2
    4 2 8 16 4
    4 1 4 16 1
    6 3 18 36 9
    5 2 10 25 4
    4 1 4 16 1
    ΣX = 23 ΣY = 9 ΣXY = 44 ΣX2 = 109 ΣY2 = 19
    • Put all the values in the formula

    •r =
    •r =
    •r =
    •r = 0.87 (So, X and Y are positively correlated).
    Example 1 Find the correlation
    coefficient between Age and Weight.
    Solution
    Example-2 Find correlation coefficient between growth and
    index.
    Solution
    Example 3

    • Daily Return for Two


    Stocks are given below

    Find the covariance


    between the two stocks (the
    data is the sample data)
    Solution-1
    Sample Covariance formula

    • For ABC, the mean would be (1.1 + 1.7 + 2.1 + 1.4 + 0.2) / 5 = 1.30.
    • For XYZ, the mean would be (3 + 4.2 + 4.9 + 4.1 + 2.5) / 5 = 3.74.

    Covariance = [(1.1 - 1.30) x (3 - 3.74)] + [(1.7 - 1.30) x (4.2 - 3.74)] + [(2.1 - 1.30) x
    (4.9 - 3.74)] + …/(5-1)
    • = ([0.148] + [0.184] + [0.928] + [0.036] + [1.364]) / (5-1)
    • = 2.66 / (5 - 1)
    • = 0.665
    Relation between (PMF and CDF) and (PDF and CDF)
    PMF – PROBABILITY MASS FUNCTION
    PDF – PROBABILITY DENSITY FUNCTION
    CDF – CUMULATIVE DISTRIBUTION FUNCTION
    Problem 1
    •
    Solution. For cdf, we have integrated from 1 to
    infinity.
    Problem 2
    Solution

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