Statistics for

Business and Economics

7th Edition

Chapter 2

Describing Data: Numerical

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-1
 Chapter Goals
After completing this chapter, you should be able to:
 Compute and interpret the mean, median, and mode for a
set of data
 Find the range, variance, standard deviation, and
coefficient of variation and know what these values mean
 Apply the empirical rule to describe the variation of
population values around the mean
 Explain the weighted mean and when to use it
 Explain how a least squares regression line estimates a
linear relationship between two variables

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-2
 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
 Symmetric and skewed distributions
 Population summary measures
 Mean, variance, and standard deviation
 The empirical rule and Bienaymé-Chebyshev rule

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-3
 Chapter Topics
(continued)

 Five number summary and box-and-whisker

plots
 Covariance and coefficient of correlation
 Pitfalls in numerical descriptive measures and
ethical considerations

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-4
 Describing Data Numerically
Describing Data Numerically

Central Tendency Variation

Arithmetic Mean Range

Median Interquartile Range

Mode Variance

Standard Deviation

Coefficient of Variation

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-5
 2.1
Measures of Central Tendency
Overview
Central Tendency

Mean Median Mode

x i
x i1
n
Arithmetic Midpoint of Most frequently
average ranked values observed value

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-6
 Arithmetic Mean
 The arithmetic mean (mean) is the most
common measure of central tendency
 For a population of N values:
N

x
x1  x 2    x N
i Population
μ  i1
values
N N
Population size

 For a sample of size n:

n

x i
x1  x 2    x n Observed
x i1
 values
n n
Sample size
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-7
 Arithmetic Mean
(continued)

 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 0 1 2 3 4 5 6 7 8 9 10

Mean = 3 Mean = 4
1  2  3  4  5 15 1  2  3  4  10 20
 3  4
5 5 5 5

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-8
 Median
 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-9
 Finding the Median

 The location of the median:

n 1
Median position  position in the ordered data
2
 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-10
 Mode
 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 0 1 2 3 4 5 6

No Mode
Mode = 9
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-11
 Review Example
 Five houses on a hill by the beach
$2,000 K
House Prices:

$2,000,000
500,000 $500 K
300,000 $300 K
100,000
100,000

$100 K

$100 K

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-12
 Review Example:
Summary Statistics

House Prices:
 Mean: ($3,000,000/5)
$2,000,000 = $600,000
500,000
300,000
100,000
100,000  Median: middle value of ranked data
Sum 3,000,000
= $300,000

 Mode: most frequent value

= $100,000

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-13
 Which measure of location
is the “best”?

 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-14
 Shape of a Distribution

 Describes how data are distributed

 Measures of shape
 Symmetric or skewed

Left-Skewed Symmetric Right-Skewed

Mean < Median Mean = Median Median < Mean

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-15
 Geometric Mean
 Geometric mean
 Used to measure the rate of change of a variable
over time

x g  (x1  x 2  xn )  (x1  x 2  xn )

n 1/n

 Geometric mean rate of return

 Measures the status of an investment over time

rg  (x1  x2 ...  xn )1/n  1

 Where xi is the rate of return in time period i
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-16
 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?

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-17
 Example
(continued)

Use the 1-year returns to compute the arithmetic

mean and the geometric mean:

Arithmetic (50%)  (20%)

mean rate X  35% Misleading result
2
of return:

Geometric rg  (x1  x 2 )1/n  1

mean rate
 [(50)  (20)]1/2  1 More
of return:
 (1000)1/2  1  31.623  1  30.623% accurate
result
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-18
 2.2
Measures of Variability
Variation

Range Interquartile Variance Standard Coefficient of

Range Deviation Variation

 Measures of variation give

information on the spread
or variability of the data
values.

Same center,
different variation
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-19
 Range

 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-20
 Disadvantages of the Range
 Ignores the way in which data are distributed

7 8 9 10 11 12 7 8 9 10 11 12
Range = 12 - 7 = 5 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-21
 Interquartile Range

 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-22
 Interquartile Range

Example:
Median X
X Q1 Q3 maximum
minimum (Q2)
25% 25% 25% 25%

12 30 45 57 70

Interquartile range
= 57 – 30 = 27

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-23
 Quartiles
 Quartiles split the ranked data into 4 segments with
an equal number of values per segment

25% 25% 25% 25%

Q1 Q2 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-24
 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: Q2 = 0.50(n+1)

(the median position)

Third quartile position: Q3 = 0.75(n+1)

where n is the number of observed values

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-25
 Quartiles

 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-26
 Population Variance

 Average of squared deviations of values from

the mean
N
 Population variance:
 (x  μ)
i
2

σ 
2 i1
N
Where μ = population mean
N = population size
xi = ith value of the variable x
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-27
 Sample Variance

 Average (approximately) of squared deviations

of values from the mean
n
 Sample variance:
 (x  x)
i
2

s 
2 i1
n -1
Where X = arithmetic mean
n = sample size
Xi = ith value of the variable X
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-28
 Population Standard Deviation
 Most commonly used measure of variation
 Shows variation about the mean
 Has the same units as the original data

 Population standard deviation:

 i
(x  μ) 2

σ i1
N
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-29
 Sample Standard Deviation
 Most commonly used measure of variation
 Shows variation about the mean
 Has the same units as the original data

 i
 Sample standard deviation:
(x  x) 2

S i1
n -1

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-30
 Calculation Example:
Sample Standard Deviation
Sample
Data (xi) : 10 12 14 15 17 18 18 24
n=8 Mean = x = 16

(10  X)2  (12  x)2  (14  x)2    (24  x)2

s
n 1

(10  16)2  (12  16)2  (14  16)2    (24  16)2


8 1

126 A measure of the “average”

  4.2426 scatter around the mean
7
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-31
 Measuring variation

Small standard deviation

Large standard deviation

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 Comparing Standard Deviations

Data A
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = 3.338

Data B
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = 0.926
Data C
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = 4.570

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-33
 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)

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-34
 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

 s
CV     100%
x 
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-35
 Comparing Coefficient
of Variation
 Stock A:
 Average price last year = $50

 Standard deviation = $5

s $5
CVA    100%  100%  10%
x $50 Both stocks
 Stock B: have the same
standard
 Average price last year = $100 deviation, but
stock B is less
 Standard deviation = $5 variable relative
to its price
s $5
CVB    100%  100%  5%
x $100
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-36
 Using Microsoft Excel

 Descriptive Statistics can be obtained

from Microsoft® Excel
 Select:
data / data analysis / descriptive statistics

 Enter details in dialog box

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-37
 Using Excel

 Select data / data analysis / descriptive statistics

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-38
 Using Excel

 Enter input
range details

 Check box for

summary
statistics

 Click OK
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-39
 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-40
 Chebychev’s Theorem

 For any population with mean μ and

standard deviation σ , and k > 1 , the
percentage of observations that fall within
the interval
[μ + kσ]
Is at least

100[1 (1/k )]% 2

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-41
 Chebychev’s Theorem
(continued)

 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)
 Examples:

At least within
(1 - 1/1.52) = 55.6% ……... k = 1.5 (μ ± 1.5σ)
(1 - 1/22) = 75% …........... k = 2 (μ ± 2σ)
(1 - 1/32) = 89% …….…... k = 3 (μ ± 3σ)

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-42
 The Empirical Rule

 If the data distribution is bell-shaped, then

the interval:
 μ  1σ contains about 68% of the values in
the population or the sample

68%

μ
μ  1σ
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-43
 The Empirical Rule
 μ  2σ contains about 95% of the values in
the population or the sample
 μ  3σ contains almost all (about 99.7%) of
the values in the population or the sample

95% 99.7%

μ  2σ μ  3σ

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-44
 2.3
Weighted Mean

 The weighted mean of a set of data is

n

w x i i
w 1x1  w 2 x 2    w n x n
x i1

n n
 Where wi is the weight of the ith observation
and n  w i

 Use when data is already grouped into n classes, with

wi values in the ith class

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-45
 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 i
where
K
n   fi
x i1
i1
n

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-46
 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

i i
f (m  x) 2

s2  i1
n 1

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-47
 2.4
The Sample Covariance
 The covariance measures the strength of the linear relationship
between two variables

 The population covariance:

N

 (x   i x )(y i   y )
Cov (x , y)   xy  i1
N
 The sample covariance:
n

 (x  x)(y  y)
i i
Cov (x , y)  s xy  i1
n 1
 Only concerned with the strength of the relationship
 No causal effect is implied
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-48
 Interpreting Covariance

 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

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-49
 Coefficient of Correlation
 Measures the relative strength of the linear relationship
between two variables

 Population correlation coefficient:

Cov (x , y)
ρ
σXσY
 Sample correlation coefficient:
Cov (x , y)
r
sX sY

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-50
 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 any positive linear
relationship

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-51
 Scatter Plots of Data with Various
Correlation Coefficients
Y Y Y

X X X
r = -1 r = -.6 r=0
Y
Y Y

X X X
r = +1 r = +.3 r=0
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-52
 Using Excel to Find
the Correlation Coefficient
 Select Data / Data Analysis

 Choose Correlation from the selection menu

 Click OK . . .

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-53
 Using Excel to Find
the Correlation Coefficient
(continued)

 Input data range and select

appropriate options
 Click OK to get output

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-54
 Interpreting the Result
Scatter Plot of Test Scores
 r = .733 100

95

Test #2 Score
 There is a relatively 90

85

strong positive linear 80

relationship between 75

test score #1 70
70 75 80 85 90 95 100

Test #1 Score
and test score #2

 Students who scored high on the first test tended

to score high on second test

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-55
 Chapter Summary
 Described measures of central tendency
 Mean, median, mode
 Illustrated the shape of the distribution
 Symmetric, skewed
 Described measures of variation
 Range, interquartile range, variance and standard deviation,
coefficient of variation
 Discussed measures of grouped data
 Calculated measures of relationships between
variables
 covariance and correlation coefficient

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-56