Lecture Notes 02

Statistics for
Business and Economics

8th Edition
Chapter 2
Describing Data: Numerical
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
Ch. 2-1
Describing Data Numerically

Describing Data Numerically
Central Tendency
Variation
Arithmetic Mean
Range
Median
Interquartile Range
Mode
Variance
Standard Deviation
Coefficient of Variation
Ch. 2-2
Measures of Central Tendency
2.1
Overview
Central Tendency
Mean
Median
Mode
Midpoint of
ranked values
Most frequently
observed value
x=
i=1
Arithmetic
average
(if one exists)

Ch. 2-3
Arithmetic Mean
n
The arithmetic mean (mean) is the most

common measure of central tendency
n
For a population of N values:

N
x1 + x 2 + ! + x N
=
=
N
N
i=1
Population
values
Population size
For a sample of size n:

n
x=
x
i=1
x1 + x 2 + ! + x n
=
n
Observed
values
Sample size
Ch. 2-4
Arithmetic Mean
(continued)
n
n
n
The most common measure of central tendency

Mean = sum of values divided by the number of values
Affected by extreme values (outliers)
0 1 2 3 4 5 6 7 8 9 10
Mean = 3
1 + 2 + 3 + 4 + 5 15
=
=3
5
5
0 1 2 3 4 5 6 7 8 9 10
Mean = 4
1 + 2 + 3 + 4 + 10 20
=
=4
5
5
Ch. 2-5
Median
n
In an ordered list, the median is the middle

number (50% above, 50% below)
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 9 10
Median = 3
Median = 3
Not affected by extreme values
Ch. 2-6
Finding the Median

n
The location of the median:
n + 1
Median position =
2
n
n
th
position in the ordered data
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
n +1
Note that
is not the value of the median, only the
2
position of the median in the ranked data
Ch. 2-7
Mode
n
n
n
n
n
n
A measure of central tendency

Value that occurs most often
Not affected by extreme values
Used for either numerical or categorical 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
Ch. 2-8
Which measure of location

is the best?
n
Mean is generally used, unless extreme values

(outliers) exist . . .
Then median is often used, since the median
is not sensitive to extreme values.
n
Example: Median home prices may be reported for

a region less sensitive to outliers
Ch. 2-9
Shape of a Distribution
n
Describes how data are distributed
Measures of shape
n
Symmetric or skewed
Left-Skewed
Symmetric
Right-Skewed
Mean < Median
Mean = Median
Median < Mean
Ch. 2-10
Geometric Mean
n
Geometric mean
n
Used to measure the rate of change of a variable

over time
1/n
x g = (x1 x 2 ! x n ) = (x1 x 2 ! x n )
n
Geometric mean rate of return

n
Measures the status of an investment over time

1/n
rg = (x1 x 2 ... xn ) 1
n
Where xi is the rate of return in time period i
Ch. 2-11
Example
An investment of $100,000 rose to $150,000 at the
end of year one and increased to $180,000 at end
of year two:
X1 = $100,000 X2 = $150,000 X3 = $180,000
50% increase
20% increase
What is the mean percentage return over time?

Ch. 2-12
Example
(continued)
Use the 1-year returns to compute the arithmetic

mean and the geometric mean:
Arithmetic
mean rate
of return:
Geometric
mean rate
of return:
(150%) + (120%)
X=
1 = 35%
2
Misleading result
rg = (x1 x 2 )1/n 1
= [(150%) (120%)]1/2 1
1/2
= (180%) 1 = 134.16% 1 = 34.16%

Accurate
result
Ch. 2-13
Percentiles and Quartiles

n
Percentiles and Quartiles indicate the position of a

value relative to the entire set of data
Generally used to describe large data sets
Example: An IQ score at the 90th percentile means that 10%
of the population has a higher IQ score and 90% have a lower
IQ score.
Pth percentile = value located in the (P/100)(n + 1)th

ordered position
Ch. 2-14
Quartiles
n
Quartiles split the ranked data into 4 segments with

an equal number of values per segment (note that
the widths of the segments may be different)
25%
Q1
25%
25%
Q2
25%
Q3
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
Ch. 2-15
Quartile Formulas
Find a quartile by determining the value in the
appropriate position in the ranked data, where
First quartile position:
Q1 = 0.25(n+1)
Second quartile position:

(the median position)
Q2 = 0.50(n+1)
Third quartile position:
Q3 = 0.75(n+1)
where n is the number of observed values

Ch. 2-16
Quartiles
n
Example: Find the first quartile
Sample Ranked Data: 11 12 13 16 16 17 18 21 22
(n = 9)
Q1 = is in the 0.25(9+1) = 2.5 position of the ranked data
so use the value half way between the 2nd and 3rd values,
so
Q1 = 12.5
Ch. 2-17
Five-Number Summary
The five-number summary refers to five descriptive
measures:
minimum
first quartile
median
third quartile
maximum
minimum < Q1 < median < Q3 < maximum
Ch. 2-18
2.2
Measures of Variability
Variation
Range
Interquartile
Range
Variance
Standard
Deviation
Coefficient of
Variation
Measures of variation give

information on the spread
or variability of the data
values.
Same center,
different variation
Ch. 2-19
Range
n
n
Simplest measure of variation

Difference between the largest and the smallest
observations:
Range = Xlargest Xsmallest
Example:
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14
Range = 14 - 1 = 13
Ch. 2-20
Disadvantages of the Range

n
Ignores the way in which data are distributed

7
10
11
12
Range = 12 - 7 = 5
n
10
11
12
Range = 12 - 7 = 5
Sensitive to outliers
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
Range = 5 - 1 = 4
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 = 120 - 1 = 119
Ch. 2-21
Interquartile Range
n
Can eliminate some outlier problems by using

the interquartile range
Eliminate high- and low-valued observations
and calculate the range of the middle 50% of
the data
Interquartile range = 3rd quartile 1st quartile
IQR = Q3 Q1
Ch. 2-22
Interquartile Range
n
The interquartile range (IQR) measures the

spread in the middle 50% of the data
Defined as the difference between the
observation at the third quartile and the
observation at the first quartile
IQR = Q3 - Q1
Ch. 2-23
Population Variance
n
Average of squared deviations of values from

the mean
n
Population variance:
2
=
Where
(x )
i
i=1
= population mean
N = population size
xi = ith value of the variable x
Ch. 2-24
Sample Variance
n
Average (approximately) of squared deviations

of values from the mean
n
Sample variance:
2
s =
Where
(x x)
i=1
n -1
X = arithmetic mean
n = sample size
Xi = ith value of the variable X
Ch. 2-25
Population Standard Deviation

n
n
n
Most commonly used measure of variation

Shows variation about the mean
Has the same units as the original data
n
Population standard deviation:

N
(x )
i
i=1
N
Ch. 2-26
Sample Standard Deviation

n
n
n
Most commonly used measure of variation

Shows variation about the mean
Has the same units as the original data
n
Sample standard deviation:
(x x)
S=
i=1
n -1
Ch. 2-27
Calculation Example:
Sample Standard Deviation
Sample
Data (xi) :
10
12
14
n=8
s=
15
17
18
18
24
Mean = x = 16
(10 X)2 + (12 x)2 + (14 x)2 + ! + (24 x)2

n 1
(10 16)2 + (12 16)2 + (14 16)2 + ! + (24 16)2

8 1
130
7
4.3095
A measure of the average

scatter around the mean
Ch. 2-28
Measuring variation
Small standard deviation

Large standard deviation
Ch. 2-29
Comparing Standard Deviations

Mean = 15.5 for each data set
11
12
13
14
15
16
17
18
19
20 21
s = 3.338
13
14
15
16
17
18
19
20 21
s = 0.926
13
14
15
16
17
18
19
20 21 (values are dispersed far
Data A
11
12
Data B
11
12
Data C
(compare to the two

cases below)
(values are concentrated

near the mean)
s = 4.570
from the mean)

Ch. 2-30
Advantages of Variance and

Standard Deviation
n
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)
Ch. 2-31
Using Microsoft Excel

n
Descriptive Statistics can be obtained

from Microsoft Excel
n
Select:
data / data analysis / descriptive statistics
Enter details in dialog box
Ch. 2-32
Using Excel
n
Select data / data analysis / descriptive statistics
Ch. 2-33
Using Excel
Enter input
range details
Check box for

summary
statistics
Click OK
Ch. 2-34
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
Ch. 2-35
Coefficient of Variation
n
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
Population coefficient of
variation:

CV = 100%

Sample coefficient of
variation:
s
CV = 100%
x
Ch. 2-36
Comparing Coefficient
of Variation
n
Stock A:
n Average price last year = $50
n Standard deviation = $5
s
CVA =
x
Stock B:
n
n
$5
100% =
100% = 10%
$50
Average price last year = $100

Standard deviation = $5
s
CVB =
x
$5
100% =
100% = 5%
$100
Both stocks
have the same
standard
deviation, but
stock B is less
variable relative
to its price
Ch. 2-37
Chebychevs Theorem
n
For any population with mean and

standard deviation , and k > 1 , the
percentage of observations that fall within
the interval
[ k]
Is at least
2
100[1 (1/k )]%

Ch. 2-38
Chebychevs Theorem
(continued)
n
Regardless of how the data are distributed, at

least (1 - 1/k2) of the values will fall within k
standard deviations of the mean (for k > 1)
n
Examples:
At least
within
(1 - 1/1.52) = 55.6% ... k = 1.5 ( 1.5)

(1 - 1/22) = 75% ........... k = 2 ( 2)
(1 - 1/32) = 89% .... k = 3 ( 3)
Ch. 2-39
The Empirical Rule

n
If the data distribution is bell-shaped, then

the interval:
1 contains about 68% of the values in
the population or the sample
68%
1
Ch. 2-40
The Empirical Rule

(continued)
n
2 contains about 95% of the values in
the population or the sample

3 contains almost all (about 99.7%) of
the values in the population or the sample
95%
99.7%
Ch. 2-41
2.3
Weighted Mean
and Measures of Grouped Data
The weighted mean of a set of data is
n
w x
i
x=
n
w1x1 + w 2 x 2 + ! + w n x n
=
n
i=1
Where wi is the weight of the ith observation

and n =
Use when data is already grouped into n classes, with

wi values in the ith class
Ch. 2-42
Approximations for Grouped Data

Suppose data are grouped into K classes, with
frequencies f1, f2, . . ., fK, and the midpoints of the
classes are m1, m2, . . ., mK
For a sample of n observations, the mean is

K
fm
i
x=
i=1
where n = fi
i=1
Ch. 2-43
Approximations for Grouped Data

Suppose data are grouped into K classes, with
frequencies f1, f2, . . ., fK, and the midpoints of the
classes are m1, m2, . . ., mK
For a sample of n observations, the variance is

K
s2 =
2
f
(m
x
)
i i
i=1
n 1
Ch. 2-44
Measures of Relationships
Between Variables
2.4
Two measures of the relationship between

variable are
n
Covariance
n
a measure of the direction of a linear relationship

between two variables
Correlation Coefficient
n
a measure of both the direction and the strength of a

linear relationship between two variables
Ch. 2-45
Covariance
n
The covariance measures the strength of the linear relationship

The population covariance:
N
(x
i
Cov (x , y) = xy =
n
)(yi y )
i=1
The sample covariance:

n
(x x)(y y)
i
Cov (x , y) = s xy =
n
n
i=1
n 1
Only concerned with the strength of the relationship

No causal effect is implied
Ch. 2-46
Interpreting Covariance
n
Covariance between two 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
Ch. 2-47
Coefficient of Correlation
n
Measures the relative strength of the linear relationship

Population correlation coefficient:
Cov (x , y)
=
XY
n
Sample correlation coefficient:
Cov (x , y)
r=
sX sY
Ch. 2-48
Features of
Correlation Coefficient, r
n
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 any positive linear
relationship
Ch. 2-49
Scatter Plots of Data with Various

Correlation Coefficients
Y
r = -1
r = -.6
X
Y
r = +1
r=0
r = +.3
r=0
X
Ch. 2-50
Using Excel to Find

the Correlation Coefficient
n
Select Data / Data Analysis
Choose Correlation from the selection menu
Click OK . . .
Ch. 2-51
Using Excel to Find

the Correlation Coefficient
(continued)
Input data range and select

appropriate options
Click OK to get output
Ch. 2-52
Interpreting the Result

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

to score high on second test
Ch. 2-53
Chapter Summary
n
Described measures of central tendency

n
Illustrated the shape of the distribution

n
Symmetric, skewed
Described measures of variation

n
Mean, median, mode
Range, interquartile range, variance and standard deviation,

coefficient of variation
Discussed measures of grouped data

Calculated measures of relationships between
variables
n
covariance and correlation coefficient
Ch. 2-54

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Statistics for

Business and Economics

Describing Data Numerically

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Measures of Central Tendency

(if one exists)

The arithmetic mean (mean) is the most

For a population of N values:

For a sample of size n:

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

The most common measure of central tendency

In an ordered list, the median is the middle

Not affected by extreme values

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Finding the Median

The location of the median:

position in the ordered data

If the number of values is odd, the median is the middle number

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

A measure of central tendency

Which measure of location

Mean is generally used, unless extreme values

Example: Median home prices may be reported for

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Describes how data are distributed

Mean < Median

Median < Mean

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Used to measure the rate of change of a variable

Geometric mean rate of return

Measures the status of an investment over time

Where xi is the rate of return in time period i

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

X1 = $100,000 X2 = $150,000 X3 = $180,000

What is the mean percentage return over time?

Use the 1-year returns to compute the arithmetic

= (180%) 1 = 134.16% 1 = 34.16%

Percentiles and Quartiles

Percentiles and Quartiles indicate the position of a

Pth percentile = value located in the (P/100)(n + 1)th

Quartiles split the ranked data into 4 segments with

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Second quartile position:

Third quartile position:

where n is the number of observed values

Example: Find the first quartile

Sample Ranked Data: 11 12 13 16 16 17 18 21 22

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Measures of variation give

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Simplest measure of variation

Disadvantages of the Range

Ignores the way in which data are distributed

Can eliminate some outlier problems by using

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

The interquartile range (IQR) measures the

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Average of squared deviations of values from

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Average (approximately) of squared deviations

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Population Standard Deviation

Most commonly used measure of variation