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ACCA Applied Skills · Performance Management · Analytical techniques in budgeting and forecasting

A company analyses the relationship between monthly advertising spend and monthly sales revenue and calculates a correlation coefficient (r) of -0.92. Which statement is correct?

A correlation coefficient of -0.92 shows a strong negative linear relationship, meaning higher advertising spend is associated with lower sales. It is close to -1, so the link is strong. It does not prove causation, and r squared, not r, gives the proportion of variation explained.

  1. AThere is a strong negative linear relationship, so higher advertising spend is associated with lower salesCorrect
  2. BThere is a weak negative linear relationship between the variables
  3. C92% of the variation in sales is explained by advertising spend
  4. DAdvertising spend causes sales to fall by 92% for each unit of spend

Explanation

An r of -0.92 is close to -1, which indicates a strong negative linear association. The coefficient of determination would be 0.8464, not 92%, so the third option confuses r with r squared. Correlation does not prove causation, and r is not a percentage change.

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