ACCA Performance Management (F5) Certification Practice Exam

Which limitation is associated with correlation analysis?

1. Correlation can prove causality.

2. Correlation only applies to linear relationships.

3. Correlation might be misled by sample data.

4. Correlation guarantees future performance.

The correct answer is: Correlation might be misled by sample data.

Correlation analysis is a statistical tool used to measure the strength and direction of the relationship between two variables. However, one of its limitations is that correlation might be misled by sample data, meaning that the results can vary significantly based on the sample chosen for analysis. This can lead to misleading interpretations of the relationship between the variables if the sample is not representative of the entire population, or if there are outliers affecting the calculation. In practice, if a small or biased sample is used, it may not genuinely reflect the overall trend, potentially resulting in a correlation that is either inflated or deflated. This risk underscores the importance of careful sampling techniques and the need to consider the context of the data when interpreting correlation results. Understanding this limitation helps analysts recognize that correlation does not imply a true relationship without considering the underlying data conditions.