Statistics for Managers

Using Microsoft® Excel

5th Edition

Chapter 3
Numerical Descriptive Measures

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-1
 Learning Objectives

In this chapter, you will learn:

 To describe the properties of central tendency,

variation and shape in numerical data
 To calculate descriptive summary measures for a
population
 To construct and interpret a box-and-whisker plot
 To describe the covariance and coefficient of
correlation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-2
 Summary Definitions

 The central tendency is the extent to which

all the data values group around a typical or
central value.
 The variation is the amount of dispersion, or
scattering, of values
 The shape is the pattern of the distribution of
values from the lowest value to the highest
value.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-3
 Measures of Central Tendency
The Arithmetic Mean
 The arithmetic mean (mean) is the most common
measure of central tendency

For a sample of size n:

n

X i
X1  X 2    Xn
X i1

n n
Sample size Observed values

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-4
 Measures of Central Tendency
The Arithmetic Mean
 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

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-5
 Measures of Central Tendency
The Median
 In an ordered array, 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 = 4 Median = 4

 Not affected by extreme values

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-6
 Measures of Central Tendency
Locating the Median
 The median of an ordered set of data is located at the
n 1 ranked value.
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 2 is NOT the value of the median,
only the position of the median in the ranked data.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-7
 Measures of Central Tendency
The Mode
 Value that occurs most often
 Not affected by extreme values
 Used for either numerical or categorical data
 There 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

Mode = 9 No Mode

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-8
 Measures of Central Tendency
Review Example
House Prices:  Mean: ($3,000,000/5)
$2,000,000 = $600,000
500,000  Median: middle value of ranked
300,000
100,000 data
100,000 = $300,000
Sum 3,000,000  Mode: most frequent value
= $100,000

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-9
 Measures of Central Tendency
Which Measure to Choose?
 The mean is generally used, unless extreme
values (outliers) exist.
 Then median is often used, since the median
is not sensitive to extreme values. For
example, median home prices may be
reported for a region; it is less sensitive to
outliers.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-10
 Quartile Measures
 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 values are greater than the third quartile

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-11
 Quartile Measures
Locating Quartiles
Find a quartile by determining the value in the appropriate
position in the ranked data, where

First quartile position: Q1 = (n+1)/4 ranked value

Second quartile position: Q2 = (n+1)/2 ranked value

Third quartile position: Q3 = 3(n+1)/4 ranked value

where n is the number of observed values

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-12
 Quartile Measures
Guidelines
 Rule 1: If the result is a whole number, then the
quartile is equal to that ranked value.

 Rule 2: If the result is a fraction half (2.5, 3.5, etc),

then the quartile is equal to the average of the
corresponding ranked values.

 Rule 3: If the result is neither a whole number or a

fractional half, you round the result to the nearest
integer and select that ranked value.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-13
 Quartile Measures
Locating the First Quartile
 Example: Find the first quartile

Sample Data in Ordered Array: 11 12 13 16 16 17 18 21 22

First, note that n = 9.

Q1 = is in the (9+1)/4 = 2.5 ranked value of the ranked
data, so use the value half way between the 2nd and 3rd
ranked values,
so Q1 = 12.5
Q1 and Q3 are measures of non-central location
Q2 = median, a measure of central tendency

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-14
 Measures of Central Tendency
The Geometric Mean
 Geometric mean
 Used to measure the rate of change of a variable over time

X G  ( X 1  X 2    X n )1/ n
 Geometric mean rate of return
 Measures the status of an investment over time

RG  [(1  R1 )  (1  R 2 )    (1  Rn )]1/ n  1

 Where Ri is the rate of return in time period i

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-15
 Measures of Central Tendency
The Geometric Mean
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:

X1  $100,000 X 2  $50,000 X3  $100,000

50% decrease 100% increase

The overall two-year return is zero, since it started and ended

at the same level.
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-16
 Measures of Central Tendency
The Geometric Mean
Use the 1-year returns to compute the arithmetic mean
and the geometric mean:

Arithmetic (.5)  (1)

mean rate X  .25 Misleading result
2
of return:

R G  [(1  R1 )  (1  R2 )   (1  Rn )]1/ n  1
Geometric More
mean rate of  [(1  (.5))  (1  (1))] 1/ 2
1 accurate
return:  [(.50)  (2)]1/ 2  1  11/ 2  1  0% result

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-17
 Measures of Central Tendency
Summary
Central Tendency

Arithmetic Median Mode Geometric Mean

Mean
n

X i
XG  ( X1  X2    Xn )1/ n

X i 1
n Middle value Most
in the ordered frequently
array observed
value

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-18
 Measures of Variation

 Variation measures the spread, or dispersion,

of values in a data set.
 Range
 Interquartile Range
 Variance
 Standard Deviation
 Coefficient of Variation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-19
 Measures of Variation
Range
 Simplest measure of variation
 Difference between the largest and the smallest values:

Range = Xlargest – Xsmallest

Example:

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Range = 13 - 1 = 12
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-20
 Measures of Variation
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
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-21
 Measures of Variation
Interquartile Range
 Problems caused by outliers can be eliminated by
using the interquartile range.

 The IQR can eliminate some high and low values

and calculate the range from the remaining values.

 Interquartile range = 3rd quartile – 1st quartile

= Q3 – Q1

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-22
 Measures of Variation
Interquartile Range
Example:
Median
X Q1 Q3 X
minimum (Q2) maximum

25% 25% 25% 25%

12 30 45 57 70

Interquartile range
= 57 – 30 = 27

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-23
 Measures of Variation
Variance
 The variance is the average (approximately) of
squared deviations of values from the mean.
n

 i
(X  X ) 2

Sample variance: S 2  i1

n -1

Where X = arithmetic mean

n = sample size
Xi = ith value of the variable X

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-24
 Measures of Variation
Standard Deviation
 Most commonly used measure of variation
 Shows variation about the mean
 Has the same units as the original data

 i
(X  X ) 2

Sample standard deviation: S  i 1

n -1

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-25
 Measures of Variation
Standard Deviation
Steps for Computing Standard Deviation

1. Compute the difference between each value and

the mean.
2. Square each difference.
3. Add the squared differences.
4. Divide this total by n-1 to get the sample variance.
5. Take the square root of the sample variance to get
the sample standard deviation.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-26
 Measures of Variation
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
7 scatter around the mean

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-27
 Measures of Variation
Comparing Standard Deviation
Data A
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 S = 3.338
21

Data B Mean = 15.5

11 12 13 14 15 16 17 18 19 20
S = 0.926
21

Data C Mean = 15.5

S = 4.570
11 12 13 14 15 16 17 18 19 20 21

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-28
 Measures of Variation
Comparing Standard Deviation
Small standard deviation

Large standard deviation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-29
 Measures of Variation
Summary Characteristics
 The more the data are spread out, the greater
the range, interquartile range, variance, and
standard deviation.
 The more the data are concentrated, the
smaller the range, interquartile range,
variance, and standard deviation.
 If the values are all the same (no variation),
all these measures will be zero.
 None of these measures are ever negative.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-30
 Coefficient of Variation
 The coefficient of variation is the standard deviation
divided by the mean, multiplied by 100.
 It is always expressed as a percentage. (%)
 It shows variation relative to mean.
 The CV can be used to compare two or more sets of
data measured in different units.

S
CV     100%
X

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-31
 Coefficient of Variation
 Stock A:
Both stocks
 Average price last year = $50 have the
 Standard deviation = $5 same
S $5 standard
 
CVA     100%   100%  10%
$50 deviation,
X
but stock B
 Stock B:
is less
 Average price last year = $100 variable
 Standard deviation = $5 relative to its
 S  $5 price
CVB    100% 
 100%  5%
X  $100
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-32
 Locating Extreme Outliers
Z-Score
 To compute the Z-score of a data value, subtract the
mean and divide by the standard deviation.

 The Z-score is the number of standard deviations a

data value is from the mean.

 A data value is considered an extreme outlier if its

Z-score is less than -3.0 or greater than +3.0.

 The larger the absolute value of the Z-score, the

farther the data value is from the mean.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-33
 Locating Extreme Outliers
Z-Score
XX
Z
S

where X represents the data value

X is the sample mean
S is the sample standard deviation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-34
 Locating Extreme Outliers
Z-Score
 Suppose the mean math SAT score is 490,
with a standard deviation of 100.
 Compute the z-score for a test score of 620.

X  X 620  490 130

Z    1.3
S 100 100

 A score of 620 is 1.3 standard deviations above the

mean and would not be considered an outlier.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-35
 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

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-36
 General Descriptive Stats
Using Microsoft Excel
1. Select Tools.

2. Select Data Analysis.

3. Select Descriptive
Statistics and click OK.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-37
 General Descriptive Stats
Using Microsoft Excel
4. Enter the cell
range.
5. Check the
Summary
Statistics box.
6. Click OK

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-38
 General Descriptive Stats
Using Microsoft Excel
Microsoft Excel
descriptive statistics output,
using the house price data:

House Prices:

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

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-39
 Numerical Descriptive
Measures for a Population
 Descriptive statistics discussed previously described
a sample, not the population.

 Summary measures describing a population, called

parameters, are denoted with Greek letters.

 Important population parameters are the population

mean, variance, and standard deviation.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-40
 Population Mean

 The population mean is the sum of the values in

the population divided by the population size, N.
N

X i
X1  X 2    X N
 i 1

N N

Where μ = population mean

N = population size
Xi = ith value of the variable X

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-41
 Population Variance
 The population variance is the average of squared
deviations of values from the mean
N

 i
( X  μ) 2

σ2  i 1
N

Where μ = population mean

N = population size
Xi = ith value of the variable X

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-42
 Population Standard Deviation
 The population standard deviation is the most
commonly used measure of variation.
 It has the same units as the original data.

(X i  μ) 2
σ i 1
N

Where μ = population mean

N = population size
Xi = ith value of the variable X

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-43
 Sample statistics versus
population parameters
Measure Population Sample
Parameter Statistic
Mean
 X
Variance
2 S2
Standard
 S
Deviation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-44
 The Empirical Rule
 The empirical rule approximates the variation of
data in bell-shaped distributions.

Approximately 68% of the data in a bell-shaped

distribution lies within one standard deviation of the
mean, or μ  1σ

68%
μ
μ  1σ
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-45
 The Empirical Rule
Approximately 95% of the data in a bell-shaped
distribution lies within two standard deviation of the
mean, or μ  2σ
Approximately 99.7% of the data in a bell-shaped
distribution lies within three standard deviation of the
mean, or μ  3σ

95% 99.7%

μ  2σ μ  3σ
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-46
 Using the Empirical Rule

 Suppose that the variable Math SAT scores is bell-

shaped with a mean of 500 and a standard deviation
of 90. Then, :

 68% of all test takers scored between 410 and

590 (500 +/- 90).
 95% of all test takers scored between 320 and
680 (500 +/- 180).
 99.7% of all test takers scored between 230 and
770 (500 +/- 270).

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-47
 Chebyshev Rule
 Regardless of how the data are distributed
(symmetric or skewed), at least (1 - 1/k2) of the
values will fall within k standard deviations of
the mean (for k > 1)

 Examples:
At least within

 k=2 (1 - 1/22) = 75% ……..... (μ ± 2σ)

 k=3 (1 - 1/32) = 89% ………. (μ ± 3σ)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-48
 Exploratory Data Analysis
The Five Number Summary
 The five numbers that describe the spread of
data are:
 Minimum

 First Quartile (Q1)

 Median (Q2)
 Third Quartile (Q3)
 Maximum

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-49
 Exploratory Data Analysis
The Box-and-Whisker Plot
 The Box-and-Whisker Plot is a graphical display of
the five number summary.

25% 25% 25% 25%

Minimum 1st Median 3rd Maximum

Quartile Quartile

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-50
 Exploratory Data Analysis
The Box-and-Whisker Plot
 The Box and central line are centered between the
endpoints if data are symmetric around the median.

Min Q1 Median Q3 Max

 A Box-and-Whisker plot can be shown in either

vertical or horizontal format.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-51
 Exploratory Data Analysis
The Box-and-Whisker Plot

Left-Skewed Symmetric Right-Skewed

Q1 Q2Q3 Q1Q2Q3 Q1 Q2 Q3

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-52
 Sample Covariance
 The sample covariance measures the strength of the linear
relationship between two numerical variables.

 ( X  X)( Y  Y )
i i
 The sample covariance: cov ( X , Y )  i1
n 1

 The covariance is only concerned with the strength of the

relationship.
 No causal effect is implied.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-53
 Sample Covariance

 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

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-54
 The Correlation Coefficient
 The correlation coefficient measures the relative
strength of the linear relationship between two
variables.

 Sample coefficient of correlation:

 ( X  X)( Y  Y )
i i
cov ( X , Y )
r i 1

n n SX SY
 ( Xi  X )
i 1
2
 i
( Y
i 1
 Y ) 2

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-55
 The Correlation Coefficient
 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 linear
relationship

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-56
 The Correlation Coefficient
Y Y Y

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

Y Y

X X
X
r = +1 r = +.3
Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-57
 The Correlation Coefficient
Using Microsoft Excel
1. Select Tools/Data
Analysis
2. Choose Correlation from
the selection menu
3. Click OK . . .

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-58
 The Correlation Coefficient
Using Microsoft Excel

3. Input data range and select

appropriate options
4. Click OK to get output

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-59
 The Correlation Coefficient
Using Microsoft Excel
 r = .733
Scatter Plot of Test Scores

100

 There is a relatively 95

strong positive linear 90

Test #2 Score
relationship between test 85

score #1 and test score 80

#2. 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.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-60
 Pitfalls in Numerical
Descriptive Measures
 Data analysis is objective
 Analysis should report the summary measures that best
meet the assumptions about the data set.

 Data interpretation is subjective

 Interpretation should be done in fair, neutral and clear
manner.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-61
 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

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-62
 Chapter Summary
In this chapter, we have

 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
 Illustrated shape of distribution
 Symmetric, skewed, box-and-whisker plots

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-63
 Chapter Summary
In this chapter, we have

 Discussed covariance and correlation coefficient.

 Addressed pitfalls in numerical descriptive measures
and ethical considerations.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 3-64