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FRM Part II · FRM Exam Part II · Correlation Basics: Definitions, Applications, and Terminology

Which statement about the Pearson correlation coefficient and the Spearman rank correlation is correct?

Spearman rank correlation uses ranks, captures monotonic relationships and is less sensitive to outliers, whereas Pearson uses raw values and measures only linear dependence. The two measures generally differ, so the rank-based statement is the correct one.

  1. ASpearman measures only linear relationships, while Pearson captures any monotonic relationship
  2. BSpearman is based on ranks and captures monotonic relationships, so it is less affected by outliers than PearsonCorrect
  3. CBoth are always identical for any dataset
  4. DPearson is based on ranks, while Spearman uses raw values

Explanation

Spearman correlation is computed on ranks, so it captures monotonic (not just linear) association and is more robust to outliers. Pearson uses raw values and measures linear dependence. The two coincide only in special cases.

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