NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research
An analyst studies 40 listed Indian auto-component firms and finds that the correlation between their annual sales growth and GDP growth is 0.8. Which conclusion is best supported?
A correlation of 0.8 shows that sales growth and GDP growth tend to move together strongly, but it does not prove causation. The variance explained would be 0.64, not 80%, so claims of 80% causation or explanation are incorrect.
- AGDP growth causes 80% of sales growth in every firm
- BSales growth and GDP growth tend to move together strongly, but causation is not provenCorrect
- CSales growth and GDP growth are unrelated
- DGDP growth explains 80% of the variance in sales growth
Explanation
A correlation of 0.8 indicates a strong positive association. It does not prove causation or apply to each firm. Variance explained would be r squared = 0.64 (64%), not 80%, so the last option is wrong.
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