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Break-Out Session 1b: All Our Customers. The 95% Confidence Interval Gives Us A Range Around The Sample Mean

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27 views

Break-Out Session 1b: All Our Customers. The 95% Confidence Interval Gives Us A Range Around The Sample Mean

Uploaded by

EklilEklildz
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Kristin Fridgeirsdottir Data Analytics for Leaders

Break-Out Session 1b
Background:
This workshop covers the statistical concepts of confidence intervals and hypothesis testing.
These are important concepts when estimating an average value for a whole population based
on results from a sample. For example, if we would like to know the average spending of our
supermarket customers and we cannot ask all the customers, only few of them, then we would
like to understand how accurately the mean of this sample of customers estimates the mean of
all our customers. The 95% confidence interval gives us a range around the sample mean
such that we are 95% confident that the mean spending of all customers is within this range.
If we would like to find out whether a statement about the mean spending of customers is
likely to be true or not, e.g. “the mean spending of all customers is £50 per visit”. Then by
applying the concept of hypothesis testing, we can either reject or not reject this hypothesis,
with a specific significance level, e.g. 5% (which corresponds to 95% confidence).
Financial Return Analysis
In this exercise, you will analyse monthly financial log returns for three companies, Hanson,
Savoy and Rolls Royce, and for a market index.

Step 1: Load the data file


The data for the returns is in the file, Returns.xlsx.
Step 2: Calculate summary statistics for the returns
From the Data tab, select Data Analysis (on the right hand side). In the Data Analysis dialog
box (shown below) select Descriptive Statistics and press OK (or double-click).
If Data Analysis does not appear in the Data tab, select the File tab then Options and from
the list on the left hand side select Add-Ins. Press the Go… button at the bottom (next to the
Excel Add-ins selection). In the ensuing dialog box, click on Analysis ToolPak VBA and
then click OK. Now retry Data and then Data Analysis.

Exhibit 1: The Data Analysis dialog box

1
Specify the parameters to the descriptive statistics procedure:
Place the focus in the Input Range box by clicking in the white box. Then either:
1. select the data on the underlying spreadsheet using the mouse (i.e. select B1 and drag
down to B60) or,
2. specify the range directly by typing B1:B60
Specify that the data is grouped by columns by clicking on the top radio button.
Tick the box to say that we have “Labels in the first row”.
Towards the bottom of the dialog box, choose the Output Option: New Worksheet Ply, and
give the results worksheet the title “FTSE”.
Tick the box, which specifies Summary Statistics. Also tick the box, which specifies
Confidence Level for Mean.

Exhibit 2: The parameters for the Descriptive statistics procedure


The dialog box should now look like Exhibit 2. Perform the analysis by pressing the OK
button. Excel will create a new worksheet with the results and call it “FTSE”.
Step 3: Examine the results of the Descriptive Analysis
1. Firstly resize the columns so that you can see the results properly: Leave the first two columns
selected then on the Home tab, in the Cells group, click Format and under Cell Size click
AutoFit Column Width. Now we can see the summary statistics for the return figures of
FTSE.
Pay particular attention to the following statistics:
Mean - this is the average return
St. deviation - this measures the “variability” of the returns around the mean
Minimum - lowest return
Maximum - highest return
Count - number of observations in the sample

2
Your results should be the same as Exhibit 3, below:
FTSE

Mean -0.50666
Standard Error 0.633968
Median -0.41748
Mode #N/A
Standard Deviation 4.869604
Sample Variance 23.71304
Kurtosis -0.37464
Skewness -0.35554
Range 20.61213
Minimum -11.958
Maximum 8.654139
Sum -29.8928
Count 59
Confidence Level(95.0%) 1.269025

Exhibit 3: Summary statistics for FTSE

Why don’t we have any value for the Mode?


Step 4: Repeat the analysis for Hanson, Savoy and Rolls Royce
You can either repeat the steps above or select all the data columns to do the descriptive
analysis for all of them at the same time.
Step 5: Plotting the histogram of the sample distribution
Go back to the first worksheet, which contains the return data.
Firstly we specify the centres for the bins:
In cell G1 enter a title “Range”. In G2 enter the value -10; in G3 enter the value -8; in G4
enter -6; and so on until G12 with value 10.
(A shortcut is to enter -10 in G2, -8 in G3; then select the two cells and extend the list by
dragging downwards the small box on the bottom-right corner of the selection).
Now activate the histogram procedure:
From the Data tab, select Data Analysis… as before, but this time choose the Histogram
option.
Specify the “Input Range” as B1:B60 (i.e. the data)
Specify the “Bin range” as G1:G12
Tick the “Labels” box.
Choose the “Output option” you want.
Tick the bottom box for “Chart Output”.
Activate the procedure by pressing the “OK” button.
Excel should give you the histogram information and the histogram itself.

3
Note: you can resize the histogram by selecting the chart and dragging the corners.

Histogram

10
Frequency
8
6 Frequency
4
2
0

Range

Exhibit 4: Frequency histogram for FTSE return


Does the histogram look as you expected? Are you concerned about its shape?
Step 6: Create histograms for Hanson, Savoy and Rolls Royce
Repeat the histogram steps listed above.

Step 7: Construct 95% confidence intervals for the mean of each series
Construct 95% confidence intervals by adding and subtracting 2 times the standard error,
from the mean. For example for FTSE: [-0.51 – 2 ꞏ 0.64, -0.51 + 2 ꞏ 0.64]

You can also construct an accurate confidence interval by adding and subtracting the
“Confidence Level” number from the Descriptive Statistics Output, from the mean. For
example for FTSE: [-0.51 – 1.27, -0.51 + 1.27]

Compare these two approaches for all the data columns and explain the difference.

You can answer the questions below using the 95% confidence intervals you have
constructed above. A significance level of 5% corresponds to using 95% confidence. (To
go into the details of proper hypothesis testing you can read in the book, Wisniewski Ch
7: p232-241.)
Step 8: Is the mean return zero?
For each series, can you reject the hypothesis that the mean return is zero (use a 5%
significance level)?

Step 9: Hanson’s return


Can you reject the assertion that Hanson returns are 3.5% on average (use a 5% significance
level)?

Step 10: Comparison of returns


Is it reasonable to say that there is no significant difference between the mean of Hanson and
Rolls Royce returns (use a 5% significance level)?

4
You can answer this question by comparing the two confidence intervals OR by using one of
Excel’s hypothesis testing tools: Data…Data Analysis…t-test: Two Sample Assuming
Unequal Variances.

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