The outliers of the correlation: Outliers are observations that deviate significantly from the general trend of the data. A zero correlation occurs when the points have no discernible pattern at all.ģ. A perfect correlation occurs when all the points lie exactly on a straight line, either positive or negative. The farther the points are from a straight line, the weaker the correlation. The closer the points are to a straight line, the stronger the correlation. The strength of the correlation: The strength of the correlation refers to how closely the points on the scatter plot follow a straight line. If the points are randomly scattered, it indicates no or weak correlation, meaning that the two assets have no or little linear relationship.Ģ. If the points form a downward-sloping pattern, it indicates a negative correlation, meaning that the two assets tend to move in opposite directions. The direction of the correlation: If the points on the scatter plot form an upward-sloping pattern, it indicates a positive correlation, meaning that the two assets tend to move in the same direction. A scatter plot can show us the following information about the correlation between two assets:ġ. Scatter plots: A scatter plot is a graphical representation of the relationship between two variables, where each point on the plot corresponds to an observation of both variables. In this section, we will discuss how to create and interpret these two types of plots using some examples. There are two common ways to visualize correlation: scatter plots and correlation matrices. Visualizing the correlation between two assets can help us understand the nature, strength, and direction of their linear relationship. One of the most important aspects of correlation analysis is visualization.
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