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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

A company finds that the correlation coefficient between advertising spend and sales revenue is +0.9. Which statement is the most appropriate conclusion?

A coefficient of +0.9 shows a strong positive linear association between advertising spend and sales revenue. However, correlation does not prove causation, so it cannot be concluded that advertising causes the sales changes. Other factors may be influencing both variables.

  1. AAdvertising spend causes 90% of the change in sales revenue
  2. BThere is a strong positive linear association, but this alone does not prove that advertising causes the sales changesCorrect
  3. CSales revenue will rise by 0.9 for every 1 increase in advertising
  4. DThere is a weak relationship because the value is below 1

Explanation

A value of +0.9 is close to +1, indicating strong positive linear correlation. Correlation does not prove causation, as other factors or coincidence may be involved. Option A confuses r with r squared and causation; option C confuses r with the regression slope.

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