Correlation Coefficient Definition Formula What you Should Know About It?

Correlation Coefficient is one of the essential and most used terms when its about accounting & Financing. So, what it does means? Well, this is a statics measure which is used to understand the strength between two variables. However, there are different types that you can find in the correlation coefficient. It includes Pearson correlation, also known as Pearson’s R.  The use of this type is basically for understanding the linear regression. There are a lot more things that needed to know when it comes to Correlation Coefficient, its formula, calculation and many more.

Correlation Coefficient Formula:


Before jumping to understand the formula, its crucial to find out some necessary details to understand the concept. Correlation Coefficient is a formula that serves the purpose to find out the strong relations between the data.  It also means that the larger number shows a stronger strength between the variables’ relation; this is also called as absolute values. Well, the formula returns the -1 and 1 value; however, they also carry meanings where:

  • 1 shows a strong and positive relationship

It means that if there is any positive increase in one, another variable increase as well with the fixed proportion. For example: if the shoe size increase then the food length will get positively affected

  • -1 represents a strong and negative relationship

It means that if there is any positive increase in one, another variable will decrease with a fixed proportion. For example, The gas’s amount will decrease in perfect correlation with the increase in speed.

  • Zero for showing no relationship

It indicates that there will be no change, not positive or negative between the two variables. It shows that both variables are not related at all.

There are several types. However, the Pearson correlation is the most common one. This one is used for measuring the strength and direction between two relations of the linear regression.  Well, it cannot do the differentiation between variables which are dependent or independent.


For calculating the person correlation, it’s crucial to determine the covariance of the variables in the given question. The next step is to covariance standard deviation of each variable. It can be determined by covariance dividing by the two variable’s product and its standard deviation.

To do the measure of the data’s dispersion by its average, Standard deviating is used. Well, covariance is for calculation the variables and its changes that happen together. However, the magnitude here is unbounded, and that’s why the interpretation is difficult. Also dividing covariance by the product of standard deviation of two variables, one can be calculating the normalize statistic version. And this is when you get the Correlation Coefficient

Everything about It:

Well, the correlation coefficient can help in understanding how well the data is going to fit on a line or a curve. Francis Galton, who was the first person that understand the correlation. However, the originally it was termed as Co-relation, which means the relationship between the variables. With the help of correlation coefficient, the analyzing relations between different available turn easy and you can also take a deeper look as well.


Natraj Studied bachelor's degree in finance and business from Telangana University, Nizamabad. A Writer based In India, He has a degree in Charted Accounts and has very knowledgeable in credit repair and Banking Sectors. So, I decided to start a blog and share my knowledge to the visitors.

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