The document discusses analysis of variance (ANOVA), covariance, and correlation. It provides the following key points: 1. ANOVA is a statistical technique used to compare population means by examining variances within and between samples. If between-sample variation is larger than within, the population means are likely different. 2. Covariance measures how two random variables relate and change together. Positive covariance means variables move in the same direction, while inverse covariance means they move opposite directions. 3. Correlation assesses the strength and direction of covariance. It ranges from -1 to 1, with 1 being total positive correlation and -1 being total negative correlation. Correlation indicates how strongly variable changes are associated.

1. Niza Talukder
Lecture 4
ANOVA
Correlation
Covariance

2. ANOVA – Analysis of Variance
• The statistical methodology for comparing several means is called analysis of variance, or
ANOVA.
• Analysis of Variance (ANOVA) is a hypothesis-testing technique used to test the equality of two or
more population (or treatment) means by examining the variances of samples that are taken.
• ANOVA is based on comparing the variance (or variation) between the data samples to variation
within each particular sample. If the between variation is much larger than the within variation, the
means of different samples will not be equal. If the between and within variations are
approximately the same size, then there will be no significant difference between the sample
means.
• Suppose we want to test the effect of five different exercises. For this, we recruit 20 men and assign
one type of exercise to 4 men (5 groups). Their weights are recorded after few weeks. We may find
out whether the effect of these exercises on them is significantly different or not and this may be
done by comparing the weights of the 5 groups of 4 men each.

3. • One-way ANOVA:
is used when there is only one independent variable or one way to classify the populations of interest, e.g. to
compare cure time for three different treatments.
When an independent variable is studied by having each subject only exposed to one
condition, it is a between-subjects factor, and we will use a between-subjects ANOVA
Assumptions of ANOVA:
(i) All populations involved follow a normal distribution.
(ii) All populations have the same variance (or standard deviation).
(iii) The samples are randomly selected and independent of one another.
• Since ANOVA assumes the populations involved follow a normal distribution, ANOVA falls into a category of
hypothesis tests known as parametric tests. If the populations involved did not follow a normal distribution, an
ANOVA test could not be used to examine the equality of the sample means. Instead, one would have to use a
non-parametric test (or distribution-free test), which is a more general form of hypothesis testing that does not
rely on distributional assumptions.
• The example in the next slide is a one way ANOVA test.

4. Situation: I gave three different types of food to people taking a certain test. The observations are
the test scores. I want to find out if the type of food is really affecting the scores . Is the difference
really random? Or does the food type really affect the performance?
- Food 1 Food 2 Food 3
3 5 5
2 3 6
1 4 7
Are the means and true population mean same? Sample mean is based on three samples.
Question: If the mean of population of people taking food 1 equal to the mean of food 2.
𝐻0 = Food doesn’t make a difference ; 𝑢 1 = 𝑢 2 = 𝑢 3
𝐻1 = Food makes a difference
If they aren’t equal then food does have some impact on how people perform on test

5. Calculating SST-Total sum of squares
• A mathematical approach to determine the dispersion of data points
• Find function that best fits from the data
• It has two components: SSW and SSB
• Suppose you have the following three groups of data with n observations
• 1 2 3
3 5 5
2 3 6
1 4 7
First find the mean of the data
SST= 30 (workout shown in class)
Degrees of freedom : m×n – 1 (where n is the number of observations in each group)
Then find out how much of the variation in SST comes from variation within each of these groups versus
variation between the groups.

6. Calculation SSW and SSB
• Sum of Squares Within (SSW) – how much variation between each data point and their respective mean
Degrees of freedom: m (n-1)
Answer = 6
Our total variation was 30. So, 6 out of 30 comes from variation within these samples
• SSB - how much variation between these samples
Degrees of freedom : m - 1
First for each group, you need to find the variation between each data point to its mean and add them up
Answer = 24
SST = SSW + SSB
( for this example, we worked out manually. But for the example on slide 19, we used the following
formulas)
The formula for SST: ∑ ( 𝑥 − 𝑥)2
or ∑ 𝑥2
-
(∑𝑥2)
𝑛
SSB = ∑𝑛𝑖𝑥𝑖
2
- 𝑋2
𝑁

7. How to test the hypothesis? Figure out what are the chances of finding a statistic this extreme? We shall
come up with the F stat
ANOVA uses a new (to us) distribution,
and an associated new test statistic:
– The F distribution
– The F statistic
As usual, we’ll compute F stat from the data,
and compare this with F critical value , to see whether or not to reject the null hypothesis
F =
𝑆𝑆𝐵
𝑚−1
𝑆𝑆𝑊
𝑚(𝑛−1)
= 12
Reject null if F stat is less than the critical value.

8. • The F test is used to compare two or more means.
• It is used to test the hypothesis that there is (in the population from which we have drawn our
2 or more samples) (a) no difference between the two or more means
• Or equivalently (b) no relationship between
membership in any particular group and score on the response variable.

9. • 3 groups of 5 subjects given 15 math questions each
• Group 1 told the questions would be easy, group 2 told they would be of medium
difficulty, and group 3 told they would be difficult
• Factor: perceived difficulty
Level 1 (easy) Level 2 (medium) Level 3 (difficult)
9 4 1
12 6 3
4 8 4
8 2 5
7 10 2

10. Results, and reporting them
• So, it seems that there is a significant effect
on math scores of how easy people have been told the problems will be.
We are confident that there’s a real effect in the population, but we don’t know whether each increase
in perceived difficulty produces a significant drop in performance.
– Perhaps there’s only a difference between
“easy” and “difficult”.
– A significant F just means that at least one of our differences is significant.

11. Covariance and Correlation
Revision:
Note: Dependent and independent variables
Independent variable: As the name suggests, it is a variable that stands on its own. It is not changed by
another variable that you are trying to measure.
For graphical illustration, it is always on the x axis
Dependent variable: a variable that is changed or influenced by another factor. It is always represented in
the y axis.
For example: Income and Consumption are two variables; as your income increases, you tend to consume
more. In this situation, your dependent variable is consumption as it is determined by how much you earn.
Income stands on its own. You cannot say that the more you consume, the more you earn. Income is your
independent variable.

12. Figure 1 : Shows a positive linear relationship between economic growth and stock market returns. An
increase in economic growth will lead to a corresponding increase in the stock market returns
Figure 2: Negative relationship between gas production and gas prices. As the production
increase/supply increases, there will be a fall in prices.

13. Covariance
- Indicates how two random variables are related to one another. Example, is there a linear increase in one
associated with a linear increase in another?
- Are they moving together or in the opposite direction?
- Variables are positively related if they move in the same direction.
- Variables are inversely related if they move in opposite directions.
- This relationship is called covariance and denoted by
𝜎𝑥𝑦 = Cov (x,y) =
∑𝑖=1
𝑁
𝑥𝑖 − 𝜇𝑥 𝑦𝑖 − 𝜇𝑦
𝑁
Cov(X,Y) = E [ (X- 𝜇𝑥) 𝑌 − 𝜇𝑦 ]
Expectation is simply the long run average value.
x = the independent variable
y = the dependent variable
n = number of data points in the sample
𝜇𝑥 = the mean of the independent variable x
𝜇𝑦 = the mean of the dependent variable y

14. Exercise: The table below shows the rate of economic growth and the returns on S&P 500 (stock market index)
Economic growth % (𝑥𝑖 ) S & P 500 Returns % (𝑦𝑖 )
2.1 8
2.5 12
4.0 14
3.6 10
Using the covariance formula, you can determine whether economic growth and S&P 500 returns have a positive or
negative relationship. Before you compute the covariance, calculate the mean of x and y.

15. • However, the covariance is of little use in regression because it cannot assess the strength of a
relationship.
• It can only say if the relation between two random variables is positive or negative. Its values depends
on units in which they are measured.
• Ideally, we would like a pure, scale free measure. This can easily be obtained by dividing covariance
by product of individual standard deviations. The quantity resulting is the correlation coefficient.

16. Correlation
Correlation refers to the statistical relationship between two or more random variables. In addition to
measuring if variables are positively or negatively related, correlation also indicates the degree to which
variables tend to move together/ indicates the strength of the relationship between two variables.
For example, you might want to find out if sugar consumption is causing heart disease. If you find a
positive relation between these two variables, you might want to find out whether the extent to which
sugar consumption increases heart disease is strong or weak.
The measurement of correlation is called the correlation coefficient. It will always take a value
between 1 and -1
𝝆 =
𝑪𝒐𝒗𝒙,𝒚
𝝈𝒙 𝝈𝒚

17. • When the correlation coefficient is 1 the variables have a perfect positive correlation. This means that if one
variable moves a given amount, the second moves proportionally in the same direction. Strength of
correlation increases as the correlation coefficient approaches one.
• When correlation coefficient is zero, no relationship exists between the variables. If one variable moves, you
can make no predictions about the movement of the other variable; they are uncorrelated.
• If correlation coefficient is –1, the variables are perfectly negatively correlated (or inversely correlated) and
move opposite to each other. If one variable increases, the other variable decreases proportionally. A negative
correlation coefficient greater than –1 indicates a less than perfect negative correlation, with the strength of
the correlation growing as the number approaches –1.
• (note: in a linear relationship, a given change in the independent variable will lead to a corresponding change
in the dependent variable)
• Calculate the correlation coefficient using the previous data. You need to find the standard deviation for x
and y.

18. Scatter plot and correlation:
A scatter plot can illustrate if two variables are correlated. Which graph shows a positive relationship
between job performance and test performance?

19. Given the following return information, what is the covariance between the return of Stock A and the return
of the market index?
Using the sample covariance formula,
σxy= 0.314
The answer is positive meaning that there is a positive relationship between market index and return of stock
A. Both moves in the same direction.
Practice finding the correlation from here. Answer would be, 𝒓𝒙,𝒚 = 0.76