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

A manager states that because the correlation between ice cream sales and sunburn cases is 0.85, ice cream sales cause sunburn. Which is the most appropriate response?

The manager is wrong because correlation does not prove causation. A high coefficient of 0.85 only shows the variables move together; a third factor such as hot weather may explain both ice cream sales and sunburn, so no causal conclusion can be drawn.

  1. ACorrect, because r above 0.8 proves causation
  2. BIncorrect, because correlation alone does not prove causation; a third factor such as hot weather may drive bothCorrect
  3. CIncorrect, because r must equal 1 before any relationship exists
  4. DCorrect, because r squared of 0.85 confirms the cause

Explanation

Correlation measures association only. Hot sunny weather is a likely common factor driving both variables. A high r does not prove cause, and r need not be 1 for a relationship to exist. Also r squared would be 0.7225, not 0.85.

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