Explanation
The correlation coefficient is calculated using the formula:
ΟX,Yβ=ΟXββ
ΟYβCov(X,Y)β
From the covariance matrix:
- Variance of X = 650, so standard deviation Ο_X = β650 = 25.50
- Variance of Y = 450, so standard deviation Ο_Y = β450 = 21.21
- Covariance between X and Y = 120
Now calculate:
ΟX,Yβ=25.50Γ21.21120β=540.855120β=0.2218β0.22
Therefore, the correlation coefficient is approximately 0.22.
Key points:
- The diagonal elements of a covariance matrix represent variances
- Off-diagonal elements represent covariances
- Correlation is the standardized covariance (covariance divided by the product of standard deviations)
- Correlation values range from -1 to +1