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ACCA Applied Knowledge · Management Accounting · Summarising and analysing data

A company finds that the correlation coefficient between monthly advertising spend and monthly sales revenue is +0.92. Which statement is the most appropriate interpretation?

The correlation coefficient of +0.92 shows a strong positive linear relationship between advertising spend and sales revenue. It does not prove causation, and it is not the percentage of variation explained, which would be r squared, about 84.6%.

  1. AThere is a strong positive linear relationship between advertising spend and sales revenueCorrect
  2. BAdvertising spend causes 92% of the change in sales revenue
  3. C92% of the variation in sales revenue is explained by advertising spend
  4. DThere is a weak positive relationship between the two variables

Explanation

A coefficient of +0.92 is close to +1, so the linear relationship is strong and positive. Option C confuses r with r-squared; the coefficient of determination is 0.92^2 = 0.846, about 84.6%. Correlation also does not prove causation.

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