Bbs10 ppt ch03

Basic Business Statistics, 10e © 2006 Prentice-Hall, Inc.. Chap 3-1
Chapter 3
Numerical Descriptive Measures
Basic Business Statistics
10th
Edition

Basic Business Statistics, 10e ©
2006 Prentice-Hall, Inc. Chap 3-2
In this chapter, you learn:
 To describe the properties of central tendency,
variation, and shape in numerical data
 To calculate descriptive summary measures for a
population
 To calculate the coefficient of variation and Z-
scores
 To construct and interpret a box-and-whisker plot
 To calculate the covariance and the coefficient of
correlation
Learning Objectives

Chapter Topics
 Measures of central tendency, variation, and
shape
 Mean, median, mode, geometric mean
 Quartiles
 Range, interquartile range, variance and standard
deviation, coefficient of variation, Z-scores
 Symmetric and skewed distributions
 Population summary measures
 Mean, variance, and standard deviation
 The empirical rule and Chebyshev rule

Chapter Topics
 Five number summary and box-and-whisker
plot
 Covariance and coefficient of correlation
 Pitfalls in numerical descriptive measures and
ethical issues
(continued)

Summary Measures
Arithmetic Mean
Median
Mode
Describing Data Numerically
Variance
Standard Deviation
Coefficient of Variation
Range
Interquartile Range
Geometric Mean
Skewness
Central Tendency Variation ShapeQuartiles

Measures of Central Tendency
Central Tendency
Arithmetic Mean Median Mode Geometric Mean
n
X
X
n
i
i∑=
= 1
n/1
n21G )XXX(X ×××= 
Overview
Midpoint of
ranked
values
Most
frequently
observed
value

Arithmetic Mean
 The arithmetic mean (mean) is the most
common measure of central tendency
 For a sample of size n:
Sample size
n
XXX
n
X
X n21
n
1i
i
+++
==
∑= 
Observed values

Arithmetic Mean
 The most common measure of central tendency
 Mean = sum of values divided by the number of values
 Affected by extreme values (outliers)
(continued)
0 1 2 3 4 5 6 7 8 9 10
Mean = 3
0 1 2 3 4 5 6 7 8 9 10
Mean = 4
3
5
15
5
54321
==
++++
4
5
20
5
104321
==
++++

Median
 In an ordered array, the median is the “middle”
number (50% above, 50% below)
 Not affected by extreme values
0 1 2 3 4 5 6 7 8 9 10
Median = 3
0 1 2 3 4 5 6 7 8 9 10
Median = 3

Finding the Median
 The location of the median:
 If the number of values is odd, the median is the middle number
 If the number of values is even, the median is the average of
the two middle numbers
 Note that is not the value of the median, only the
position of the median in the ranked data
dataorderedtheinposition
2
1n
positionMedian
+
=
2
1n +

Mode
 A measure of central tendency
 Value that occurs most often
 Not affected by extreme values
 Used for either numerical or categorical
(nominal) data
 There may may be no mode
 There may be several modes
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Mode = 9
0 1 2 3 4 5 6
No Mode

 Five houses on a hill by the beach
Review Example
$2,000 K
$500 K
$300 K
$100 K
$100 K
House Prices:
$2,000,000
500,000
300,000
100,000
100,000

Review Example:
Summary Statistics
 Mean: ($3,000,000/5)
= $600,000
 Median: middle value of ranked data
= $300,000
 Mode: most frequent value
= $100,000
House Prices:
$2,000,000
500,000
300,000
100,000
100,000
Sum $3,000,000

 Mean is generally used, unless
extreme values (outliers) exist
 Then median is often used, since
the median is not sensitive to
extreme values.
 Example: Median home prices may be
reported for a region – less sensitive to
outliers
Which measure of location
is the “best”?

Quartiles
 Quartiles split the ranked data into 4 segments with
an equal number of values per segment
25% 25% 25% 25%
 The first quartile, Q1, is the value for which 25% of the
observations are smaller and 75% are larger
 Q2 is the same as the median (50% are smaller, 50% are
larger)
 Only 25% of the observations are greater than the third
quartile
Q1 Q2 Q3

Quartile Formulas
Find a quartile by determining the value in the
appropriate position in the ranked data, where
First quartile position: Q1 = (n+1)/4
Second quartile position: Q2 = (n+1)/2 (the median position)
Third quartile position: Q3 = 3(n+1)/4
where n is the number of observed values

(n = 9)
Q1 is in the (9+1)/4 = 2.5 position of the ranked data
so use the value half way between the 2nd
and 3rd
values,
so Q1 = 12.5
Quartiles
Sample Data in Ordered Array: 11 12 13 16 16 17 18 21 22
 Example: Find the first quartile
Q1 and Q3 are measures of noncentral location
Q2 = median, a measure of central tendency

(n = 9)
Q1 is in the (9+1)/4 = 2.5 position of the ranked data,
so Q1 = 12.5
Q2 is in the (9+1)/2 = 5th
position of the ranked data,
so Q2 = median = 16
Q3 is in the 3(9+1)/4 = 7.5 position of the ranked data,
so Q3 = 19.5
Quartiles
Sample Data in Ordered Array: 11 12 13 16 16 17 18 21 22
 Example:
(continued)

Geometric Mean
 Geometric mean
 Used to measure the rate of change of a variable
over time
 Geometric mean rate of return
 Measures the status of an investment over time
 Where Ri is the rate of return in time period i
n/1
n21G )XXX(X ×××= 
1)]R1()R1()R1[(R n/1
n21G −+××+×+= 

Example
An investment of $100,000 declined to $50,000 at the
end of year one and rebounded to $100,000 at end
of year two:
000,100$X000,50$X000,100$X 321 ===
50% decrease 100% increase
The overall two-year return is zero, since it started and
ended at the same level.

Example
Use the 1-year returns to compute the arithmetic
mean and the geometric mean:
%0111)]2()50[(.
1%))]100(1(%))50(1[(
1)]R1()R1()R1[(R
2/12/1
2/1
n/1
n21G
=−=−×=
−+×−+=
−+××+×+= 
%25
2
%)100(%)50(
X =
+−
=
Arithmetic
mean rate
of return:
Geometric
mean rate
of return:
Misleading result
More
accurate
result
(continued)

Same center,
different variation
Measures of Variation
Variation
Variance Standard
Deviation
Coefficient
of Variation
Range Interquartile
Range
 Measures of variation give
information on the spread or
variability of the data
values.

Range
 Simplest measure of variation
 Difference between the largest and the smallest
values in a set of data:
Range = Xlargest – Xsmallest
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Range = 14 - 1 = 13
Example:

 Ignores the way in which data are distributed
 Sensitive to outliers
7 8 9 10 11 12
Range = 12 - 7 = 5
7 8 9 10 11 12
Range = 12 - 7 = 5
Disadvantages of the Range
1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,5
1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,120
Range = 5 - 1 = 4
Range = 120 - 1 = 119

Interquartile Range
 Can eliminate some outlier problems by using
the interquartile range
 Eliminate some high- and low-valued
observations and calculate the range from the
remaining values
 Interquartile range = 3rd
quartile – 1st
quartile
= Q3 – Q1

Interquartile Range
Median
(Q2)
X
maximumX
minimum Q1 Q3
Example:
25% 25% 25% 25%
12 30 45 57 70
Interquartile range
= 57 – 30 = 27

 Average (approximately) of squared deviations
of values from the mean
 Sample variance:
Variance
1-n
)X(X
S
n
1i
2
i
2
∑=
−
=
Where = mean
n = sample size
Xi = ith
value of the variable X
X

Standard Deviation
 Most commonly used measure of variation
 Shows variation about the mean
 Is the square root of the variance
 Has the same units as the original data
 Sample standard deviation:
1-n
)X(X
S
n
1i
2
i∑=
−
=

Calculation Example:
Sample Standard Deviation
Sample
Data (Xi) : 10 12 14 15 17 18 18 24
n = 8 Mean = X = 16
4.3095
7
130
18
16)(2416)(1416)(1216)(10
1n
)X(24)X(14)X(12)X(10
S
2222
2222
==
−
−++−+−+−
=
−
−++−+−+−
=


A measure of the “average”
scatter around the mean

Measuring variation
Small standard deviation
Large standard deviation

Comparing Standard Deviations
Mean = 15.5
S = 3.33811 12 13 14 15 16 17 18 19 20 21
11 12 13 14 15 16 17 18 19 20 21
Data B
Data A
Mean = 15.5
S = 0.926
11 12 13 14 15 16 17 18 19 20 21
Mean = 15.5
S = 4.567
Data C

Advantages of Variance and
Standard Deviation
 Each value in the data set is used in the
calculation
 Values far from the mean are given extra
weight
(because deviations from the mean are squared)

Coefficient of Variation
 Measures relative variation
 Always in percentage (%)
 Shows variation relative to mean
 Can be used to compare two or more sets of
data measured in different units
100%
X
S
CV ⋅







=

Comparing Coefficient
of Variation
 Stock A:
 Average price last year = $50
 Standard deviation = $5
 Stock B:
 Average price last year = $100
 Standard deviation = $5
Both stocks
have the same
standard
deviation, but
stock B is less
variable relative
to its price
10%100%
$50
$5
100%
X
S
CVA =⋅=⋅







=
5%100%
$100
$5
100%
X
S
CVB =⋅=⋅







=

Z Scores
 A measure of distance from the mean (for example, a
Z-score of 2.0 means that a value is 2.0 standard
deviations from the mean)
 The difference between a value and the mean, divided
by the standard deviation
 A Z score above 3.0 or below -3.0 is considered an
outlier
S
XX
Z
−
=

Z Scores
Example:
 If the mean is 14.0 and the standard deviation is 3.0,
what is the Z score for the value 18.5?
 The value 18.5 is 1.5 standard deviations above the
mean
 (A negative Z-score would mean that a value is less
than the mean)
1.5
3.0
14.018.5
S
XX
Z =
−
=
−
=
(continued)

Shape of a Distribution
 Describes how data are distributed
 Measures of shape
 Symmetric or skewed
Mean = MedianMean < Median Median < Mean
Right-SkewedLeft-Skewed Symmetric

Using Microsoft Excel
 Descriptive Statistics can be obtained
from Microsoft®
Excel
 Use menu choice:
tools / data analysis / descriptive statistics
 Enter details in dialog box

Using Excel
Use menu choice:
tools / data analysis /
descriptive statistics

 Enter dialog box
details
 Check box for
summary statistics
 Click OK
Using Excel
(continued)

Excel output
Microsoft Excel
descriptive statistics output,
using the house price data:
House Prices:
$2,000,000
500,000
300,000
100,000
100,000

Numerical Measures
for a Population
 Population summary measures are called parameters
 The population mean is the sum of the values in the
population divided by the population size, N
N
XXX
N
X
N21
N
1i
i
+++
==µ
∑= 
μ = population mean
N = population size
Xi = ith
Where

 Average of squared deviations of values from
the mean
 Population variance:
Population Variance
N
μ)(X
σ
N
1i
2
i
2
∑=
−
=
Where μ = population mean
N = population size
Xi = ith

Population Standard Deviation
 Most commonly used measure of variation
 Shows variation about the mean
 Is the square root of the population variance
 Has the same units as the original data
 Population standard deviation:
N
μ)(X
σ
N
1i
2
i∑=
−
=

 If the data distribution is approximately
bell-shaped, then the interval:
 contains about 68% of the values in
the population or the sample
The Empirical Rule
1σμ ±
μ
68%
1σμ ±

 contains about 95% of the values in
the population or the sample
 contains about 99.7% of the values
in the population or the sample
The Empirical Rule
2σμ ±
3σμ ±
3σμ ±
99.7%95%
2σμ ±

 Regardless of how the data are distributed,
at least (1 - 1/k2
) x 100% of the values will
fall within k standard deviations of the mean
(for k > 1)
 Examples:
(1 - 1/12
) x 100% = 0% ……..... k=1 (μ ± 1σ)
(1 - 1/22
) x 100% = 75% …........ k=2 (μ ± 2σ)
(1 - 1/32
) x 100% = 89% ………. k=3 (μ ± 3σ)
Chebyshev Rule
withinAt least

Approximating the Mean from a
Frequency Distribution
 Sometimes only a frequency distribution is available, not
the raw data
 Use the midpoint of a class interval to approximate the
values in that class
 Where n = number of values or sample size
c = number of classes in the frequency distribution
mj = midpoint of the jth
class
fj = number of values in the jth
class
n
fm
X
c
1j
jj∑=
=

Approximating the Standard Deviation
from a Frequency Distribution
 Assume that all values within each class interval
are located at the midpoint of the class
 Approximation for the standard deviation from a
frequency distribution:
1-n
f)X(m
S
c
1j
j
2
j∑=
−
=

Exploratory Data Analysis
 Box-and-Whisker Plot: A Graphical display of
data using 5-number summary:
Minimum -- Q1 -- Median -- Q3 -- Maximum
Example:
Minimum 1st Median 3rd Maximum
Quartile Quartile
Minimum 1st Median 3rd Maximum
Quartile Quartile
25% 25% 25% 25%

Shape of Box-and-Whisker Plots
 The Box and central line are centered between the
endpoints if data are symmetric around the median
 A Box-and-Whisker plot can be shown in either vertical
or horizontal format
Min Q1 Median Q3 Max

Distribution Shape and
Box-and-Whisker Plot
Right-SkewedLeft-Skewed Symmetric
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3

Box-and-Whisker Plot Example
 Below is a Box-and-Whisker plot for the following
data:
0 2 2 2 3 3 4 5 5 10 27
 The data are right skewed, as the plot depicts
0 2 3 5 270 2 3 5 27
Min Q1 Q2 Q3 Max

The Sample Covariance
 The sample covariance measures the strength of the
linear relationship between two variables (called
bivariate data)
 The sample covariance:
 Only concerned with the strength of the relationship
 No causal effect is implied
1n
)YY)(XX(
)Y,X(cov
n
1i
ii
−
−−
=
∑=

 Covariance between two random variables:
cov(X,Y) > 0 X and Y tend to move in the same direction
cov(X,Y) < 0 X and Y tend to move in opposite directions
cov(X,Y) = 0 X and Y are independent
Interpreting Covariance

Coefficient of Correlation
 Measures the relative strength of the linear
relationship between two variables
 Sample coefficient of correlation:
where
YX SS
Y),(Xcov
r =
1n
)X(X
S
n
1i
2
i
X
−
−
=
∑=
1n
)Y)(YX(X
Y),(Xcov
n
1i
ii
−
−−
=
∑=
1n
)Y(Y
S
n
1i
2
i
Y
−
−
=
∑=

Features of
Correlation Coefficient, r
 Unit free
 Ranges between –1 and 1
 The closer to –1, the stronger the negative linear
relationship
 The closer to 1, the stronger the positive linear
relationship
 The closer to 0, the weaker the linear relationship

Scatter Plots of Data with Various
Correlation Coefficients
Y
X
Y
X
Y
X
Y
X
Y
X
r = -1 r = -.6 r = 0
r = +.3r = +1
Y
X
r = 0

Using Excel to Find
the Correlation Coefficient
 Select
Tools/Data Analysis
 Choose Correlation from
the selection menu
 Click OK . . .

Using Excel to Find
the Correlation Coefficient
 Input data range and select
appropriate options
 Click OK to get output
(continued)

Interpreting the Result
 r = .733
 There is a relatively
strong positive linear
relationship between
test score #1
and test score #2
 Students who scored high on the first test tended
to score high on second test, and students who
scored low on the first test tended to score low on
the second test
Scatter Plot of Test Scores
70
75
80
85
90
95
100
70 75 80 85 90 95 100
Test #1 Score
Test#2Score

Pitfalls in Numerical
Descriptive Measures
 Data analysis is objective
 Should report the summary measures that best meet
the assumptions about the data set
 Data interpretation is subjective
 Should be done in fair, neutral and clear manner

Ethical Considerations
Numerical descriptive measures:
 Should document both good and bad results
 Should be presented in a fair, objective and
neutral manner
 Should not use inappropriate summary
measures to distort facts

Chapter Summary
 Described measures of central tendency
 Mean, median, mode, geometric mean
 Discussed quartiles
 Described measures of variation
 Range, interquartile range, variance and standard
deviation, coefficient of variation, Z-scores
 Illustrated shape of distribution
 Symmetric, skewed, box-and-whisker plots

Chapter Summary
 Discussed covariance and correlation
coefficient
 Addressed pitfalls in numerical descriptive
measures and ethical considerations
(continued)

Bbs10 ppt ch03

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