This article explains how to compute a correlation matrix Using MS Excel. With the help of Analysis ToolPak, a correlation matrix can be generated quickly and easily.

**Correlation** is used to measure strength of the relationship between two variables. It can be positive, negative or zero.

**Positive Correlation :**Both variables tend to move in the same direction: If one variable increases, the other tends to increase. If one decreases, the other tends to decrease.

**Negative Correlation :**Both variables tend to move in the opposite directions: If one variable increases, the other tends to decrease, and vice-versa.

Note: The correlation coefficient may take on any value between +1 and -1.

**Examples**

1: How are sales of ABC Company and GDP related?

2: How are annual returns on Treasury Bills and Bonds related?

When you need to calculate correlation between more than two variables, it is generally called correlation matrix. It is also called multiple correlation coefficient. Let's solve it with a case study.

Suppose you would like to know whether there is a relationship between grades and number of hours you spend studying.You can

**download the workbook**used in this example and practice what you learn.

- If you haven't already installed the
**Analysis ToolPak**, click the**Microsoft Office**button, then click on**Excel Options**, and then select**Add-Ins**. Click**Go**, check the**Analysis ToolPak**box, and click**OK**. For more details on how to install the Analysis ToolPak, refer to the**How to Install Analysis ToolPak**. - Select the
**Data**tab, then click on the**Data Analysis**option, and choose**Correlation**from the list. Click**OK**. (Data tab >> Data Analysis >> Correlation) - Select the
**data range**(both independent and dependent variables) in the**Input Range**box. - Check the
**Labels in first row**option, enter the range in the**Output Range**box, and click**OK**.

Excel : Multiple Correlation Coefficient |

Output : Correlation Coefficient |

As you see the correlation between the grades and number of hours you spend studying is a very positive correlation (84%). This means as more number of hours students study their grades improve.

Understand Correlation |

By using CORREL function, you can calculate correlation coefficient of two variables (ranges)

**Syntax:**

=CORREL (range1, range2)

For the above problem the syntax would be =CORREL($A$2:$A$500, $B$2:$B$500)

To calculate multiple correlation coefficient with Excel Formula, visit this link : **Formula Explained:Correlation Matrix**

**Fun : **In a heated argument, the regression shouted at correlation, "You are dumbass, you don’t even know the cause and effect of this argument"

Hi, I would like to produce a complete correlation matrix (not the diagonally halved one with 1s running down the top margin). How do I generate it in Excel or any open source Stat package? Thx

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