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# Scatter Plots and Correlations

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a. Plot the variables Net Sales (y) and Working Capital (x) in scatter-plot format. What type of relationship appears to exist between Working Capital and Net Sales? Indicate whether a regression model or a correlation model would be more appropriate. Give statistical reasons for your answer.

b. Compute the correlation coefficient between Working Capital and Net Sales. What does the correlation coefficient measure?

c. Test to determine if when Net sales declines, Working Capital will also decline. (Hint, think what this indicates for the value of the population correlation coefficient.) Clearly state your null and alternative hypotheses. Conduct your test at a significance level or 0.05. Be sure to state a conclusions for your test.

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#### Solution Preview

a. Plot the variables Net Sales (y) and Working Capital (x) in scatter-plot format. What type of relationship appears to exist between Working Capital and Net Sales? Indicate whether a regression model or a correlation model would be more appropriate. Give statistical reasons for your answer.

I made the scatterplot in Excel and pasted it below:

It looks as if there is a linear relationship between the two variables. I think we should to a regression analysis on this data to look at the relationship between the two variables. When making a regression model, you have the following assumptions:

* the variables are related ...

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