Correlation

Question 1

What is the mean?

Answer 1

The statistical term for average - indicates the central tendency of the distribution

Question 2

What is standard deviation?

Answer 2

A common measure of dispersion

Question 3

What does skewness measure?

Answer 3

The extent to which a distribution is not symmetric about its mean value

Question 4

What does kurtosis measure?

Answer 4

How fat the tails of the distribution are

Question 5

What does the Jarque-Beta test (JC) test?

Answer 5

Whether the same data has the skewness and kurtosis matching the normal distribution

Question 6

What is variance?

Answer 6

Indicates the width of the deviation

Question 7

What does correlation measure?

Answer 7

Numerically the relationship between two variables X and Y

Question 8

POC - what does r (or rxy) lie between?

Answer 8

-1 and +1

Question 9

POC - what does positive values of r indicate?

Answer 9

Positive correlation between X and Y

Question 10

POC - what does negative values of r indicate?

Answer 10

Negative correlation between X and Y

Question 11

POC - what does an r or 0 imply?

Answer 11

X and Y are uncorrelated

Question 12

POC - what do larger positive values of r indicate?

Answer 12

Stronger positive correlation

Question 13

POC - what does r=1 indicate?

Answer 13

Perfect positive correlation

Question 14

POC - what do more negative values of r indicate?

Answer 14

Negative correlation

Question 15

POC - what does r=-1 indicate?

Answer 15

Perfect negative correlation

Question 16

POC - the correlation between Y and X is the same as what?

Answer 16

The correlation between X and Y

Question 17

POC - What is the correlation between any variable and itself?

Answer 17

1

Question 18

What does the magnitude of r mean?

Answer 18

It measures the proportion of the variation in X that matches up with the variance of Y

Question 19

Does correlation imply causality?

Answer 19

Not necessarily. It can be very suggestive, but cannot on their own establish correlation. Correlation plus a sensible theory suggests causality, but does not prove it

Question 20

The correlation between workers’ education levels and wages is strongly positive. Does this mean education ‘causes’ higher wages?

Answer 20

We cant know for sure. 1) Education improves skills and more skilled workers get better paying jobs. Education causes wages to increase. 2) Individuals are born with quality A which is relevant for success in education and on the job. Quality A (NOT education) causes wages to increase

Question 21

Where are logarithmic transformations often used?

Answer 21

In finance and economics

Question 22

What is the base X or a logarithm?

Answer 22

Usually 10 or e since both are available on the calculator

Question 23

What ways can we convert raw prices into a series of returns?

Answer 23

Using simple returns or logarithmic returns

Question 24

What is simple returns?

Answer 24

Where Rt denotes return at time t, pt denotes the asset price at time t, (often x 100%)

Question 25

What is logarithmic returns?

Answer 25

Where Rt denotes at time t, pt denotes the asset price at time t, and ln denotes the natural logarithm (often x 100%)

Question 26

Give some examples or correlation

Answer 26

When the weather is good outside, ice cream consumption increase. Class attendance = good exam results