Chapter 3

Numerical
descriptive
measures

PowerPoint to accompany:

Cover illustration: © Raw Pixel/Shutterstock.com

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Learning Objectives

After studying this chapter you be able to:

1 calculate and interpret numerical descriptive
measures of central tendency, variation and
shape for numerical data
2 calculate and interpret descriptive
3 summary measures for a population
4 construct and interpret a box-and-whisker plot
5 calculate and interpret the covariance and the
coefficient of correlation for bivariate data

Slide 2
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Sheldon's calculation of Penny's men

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Describing Data
Describing data by its central tendency,
variation and shape

Central Tendency Quartiles Variation Shape

Arithmetic Mean Range Skewness

Median Interquartile Range

Mode Variance

Geometric Mean Standard Deviation

Coefficient of Variation

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Measures of Central Tendency

Central Tendency

Arithmetic Median Mode

Mean
n

X i
X i1
n
Midpoint of Most
ranked frequently
values observed
value
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 The Arithmetic Mean

For a sample of size n the sample mean, denoted X , is

calculated:

X i
X1  X 2    X n
X  i 1

n n

Xi’s are observed values

Where Σ means to sum or add up

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 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 = 3 Median = 3
Its main advantage over the arithmetic mean is that
it is not affected by extreme values

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Finding the Median

The location of the median:

2
Median = ranked value
n 1
2
Note that n  1 is not the value of the median, only the
position of the median in the ranked data

Rule 1: If the number of values in the data set is odd, the median
is the middle ranked value

Rule 2: If the number of values in the data set is even, the

median is the mean (average) of the two middle ranked values

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 The Mode
• A measure of central tendency
• Value that occurs most often (the most frequent)
• Not affected by extreme values

Unlike mean and median, there may be no unique (single) mode for a
given data set

Used for either numerical or categorical (nominal) data

An example of no mode:

0 1 2 3 4 5 6
An example of several modes:

Modes = 5 and 9
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
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Review Example

Prices for five houses located near the beach:

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

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Review Example (continued)

Mean=  2,000,000  500,000  300,000  100,000  100,000

5
3,000,000
 House Prices:
5
$1,000,000
 $600,000
$500,000
$300,000
$100,000
Median (position = 6/2 = 3) $100,000
= $300,000

Mode = $100,000

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Which Measure of Location is the ‘best’ in this
situation?

• The mean is generally used most often, unless extreme values

(outliers) exist

• The median is often used, since it is not sensitive to extreme

values

• The mode is usually the least used of the three

• Since we have an obvious outlier ($2,000,000), it makes sense

to use the median in this instance

• Most housing prices are now reported as median housing prices

in Australian newspapers due to possible outliers

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 Quartiles

• Quartiles split the ranked data into four segments, with an equal
number of values per segment

• The first quartile, Q1, is the value for which 25% of the observations
are smaller and 75% are larger

• The second quartile, Q2, is the same as the median (50% are smaller,
50% are larger)

• Only 25% of the observations are greater than the third quartile, Q3
25% 25% 25% 25%
Q1 Q2 Q3 Q4

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Quartiles (continued)

Similar to the median, we 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)

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

where n is the number of observed values (sample size)

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Quartile Example

First, data must be arranged in ordered array (note n = 15)

1 3 5 7 8 10 11 12 13 16 16 17 18 21 22

Q1 Q2 = median Q3

• Q1 is in the (15+1)/4 = 4th position of the ranked data,

so Q1 = 7
• Q3 is in the 3*(15+1)/2 = 12th position of the ranked
data, so Q3 = 17

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Geometric Mean vs. Geometric Mean Rate of Return

Geometric mean is used to measure the average rate of change

of a variable over n periods of time

XG  ( X1  X 2    Xn )1/ n

Geometric mean rate of return measures the status of an investment

over time or average percentage change in a variable

R G  [(1  R1 )  (1  R2 )    (1  Rn )]1/ n  1

where Ri is the rate of return in time period i

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Geometric Mean and Mean Rate Example

An investment of $100,000 declined to $50,000 at

the end of year 1 and rebounded to $100,000 at
end of year 2:

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

50% decrease 100% increase

The overall two-year rate of return is zero, since it started

and ended at the same level

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Geometric Mean and Mean Rate Example (continued)

Use the 1-year returns to calculate the

arithmetic mean and the geometric mean:

Arithmetic ( 50%)  (100%)

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

R G  [(1  R1 )  (1  R 2 )    (1  Rn )]1/ n  1
Geometric
mean rate  [(1  ( 50%))  (1  (100%))]1/ 2  1
of return:  [(. 50)  (2)]1/ 2  1  11/ 2  1  0%

More accurate result

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Measures of Variation

Variation

Range Interquartile Variance Standard Coefficient

Range Deviation of Variation

Measures of variation
give information on
the spread or
variability of the data
values
E.g. same centre,
different variation
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The Range

Simplest measure of variation

Difference between the largest and the smallest
values in a set of data

Range = Xlargest – Xsmallest

Example:

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

Range = 14 - 1 = 13
Slide 20
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Disadvantages

Ignores the distribution of the data

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

Like the mean, the range is 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

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The Interquartile Range (IQR)

Like the median and Q1 and Q2, the IQR is a resistant

summary measure (resistant to the presence of
extreme values)

Eliminates outlier problems by using the interquartile

range, as high- and low-valued observations are
removed from calculations

IQR = 3rd quartile – 1st quartile

IQR = Q3 = Q1
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The Interquartile Range (IQR) (continued)

Example: Range = 200 – 10 = 190 (misleading)

Q2 = Median
X Q1 Q3 X
minimum maximum
25% 25% 25% 25%

10 30 45 60 200

IQR = 60 – 30 = 30
Even if the value of 200 changes to 300, IQR remains
the same, hence resistant to changes in extreme values

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The Sample Variance – S2

• Measures average scatter around the mean

• Units are also squared

 (X i  X) 2 where
X = mean
S  2 i1
n = sample size
n -1 Xi = ith value of the
variable X

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The Sample Standard Deviation - S

• Most commonly used measure of variation

• Shows variation about the mean
• Has the same units as the original data

 (X i  X) 2

S i 1
n -1

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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
130 A measure of the
 = 4.3095
7 ‘average’ scatter around
the mean
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Slide 26
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 = 4.567
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Variance and Standard Deviation

Advantages
• Each value in the data set is used in the calculation
• Values far from the mean are given extra weight as
deviations from the mean are squared

Disadvantages
• Sensitive to extreme values (outliers)
• Measures of absolute variation not relative variation

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The Coefficient of Variation

• Measures relative variation

i.e. shows variation relative to mean
• Can be used to compare two or more sets of data
measured in different units
• Always expressed as percentage (%)

S 
CV     100%
X 

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Coefficient of Variation Example

Stock A:
Average price last year = $50; standard deviation = $5

Both stocks have

S  $5 the same standard
CVA     100%   100%  10%
X  $50 deviation, but
Stock B is less
Stock B: variable relative to
its price
Average price last year = $100; standard deviation = $5

S  $5
CVB     100%   100%  5%
X  $100

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The Z Score

• The difference between a given observation and

the mean, divided by the standard deviation

XX
Z
S
For example:
• A Z score of 2.0 means that a value is 2.0 standard
deviations from the mean
• A Z score above 3.0 or below -3.0 is considered an
outlier
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Z Score
Example:

If the mean is 14.0 and the standard deviation is 3.0,

what is the Z score for the value 18.5?

X  X 18.5  14.0
Z   1.5
S 3.0

• The value 18.5 is 1.5 standard deviations above the

mean
• A negative Z score would indicate that a value is
below the mean

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The 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

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Using Microsoft Excel

Use menu choice:

Data>Data Analysis>
Descriptive Statistics

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Using Microsoft Excel (continued)

Slide 36
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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

X i
X1  X 2    XN
 i1

N N

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Population Variance vs. Standard Deviation

Population Variance: N

• the average of the squared  (X i  μ) 2

deviations of values from the σ2  i1

mean N

μ = population mean; N = population size; Xi = ith value of the variable X

Population Standard Deviation:

• shows variation about the mean
N
is the square root of the population
 i
•
variance
(X  μ) 2

• has the same units as the original σ i1

data N
Slide 38
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The Empirical Rule

If the data distribution is approximately bell-shaped,

then the interval μ  1σ contains about 68% of
the values in the population

68%

μ
μ  1σ

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The Empirical Rule (continued)
• μ  2σ
contains about 95% of the values in the population

• μ  3σ
contains about 99.7% of the values in the population

95% 99.7%

μ  2σ μ  3σ

Slide 40
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Chebyshev Rule and Examples
Regardless of how the data are distributed, the
percentage of values within k standard deviations of
the mean must be at least:
[(1 - 1/k2)] x 100% (for k > 1)

At least Within

(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)

Slide 41
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Approximating the Mean
• 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
c

m f
j1
j j

X
n
wheren = 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

Slide 42
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Approximating the Standard Deviation

Assume that all values within each class interval are

located at the midpoint of the class

 (m
j 1
j  X) f j 2

S
n -1

Slide 43
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Exploratory Data Analysis

Box-and-whisker Plot: A graphical display of data using the 5-

number summary:

Q2 = Median
X Q1 Q3 X
minimum maximum
25% 25% 25% 25%

Minimum(Xsmallest) -- Q1 -- Median -- Q3 -- Maximum (Xlargest)

Slide 44
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Distribution Shape and Box-and-whisker Plot

Left-skewed Symmetric Right-skewed

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3

Slide 45
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The Covariance

The sample covariance measures the strength of

the linear relationship between two numerical
variables:
n

 (X i  X )(Yi  Y )
cov ( X , Y )  i 1

n 1

• Only concerned with the direction of the relationship

• No causal effect is implied
• Is affected by units of measurement
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Correlation
Measures the relative strength of the linear relationship
between two variables

cov (X , Y)
r
SX SY
n

where:  (X i  X)(Yi  Y)
cov (X , Y)  i1
n 1

n n

 (Xi  X) 2
 i
(Y  Y ) 2

SX  i 1
SY  i 1
n 1 n 1
Slide 47
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Features of Correlation Coefficient, r

Also called Standardised Covariance

i.e. invariant to units of measure

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

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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
Slide 49
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 Industry Application
Skyscrapers 'linked with impending financial crashes'

• There is an ‘unhealthy correlation’ between the building of skyscrapers

and subsequent financial crashes, according to Barclays Capital.

• Examples include the Empire State building, built as the Great

Depression was under way; and the current world's tallest, the Burj
Khalifa, built just before Dubai almost went bust.

• China is currently the biggest builder of skyscrapers, the bank said.

• India also has 14 skyscrapers under construction.

‘Often the world's tallest buildings are simply the edifice of a broader
skyscraper building boom, reflecting a widespread misallocation of capital
and an impending economic correction’, Barclays Capital analysts said.
(Source: http://www.bbc.co.uk/news/business-16494013)

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Pitfalls and Ethical Issues

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 transparent manner

• Should document both good and bad results

• Results should be presented in a fair, objective and neutral

manner
• Should not use inappropriate summary measures to distort
facts
• Do not fail to report pertinent findings even if such findings do
not support original argument
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Chapter Summary
Described measures of central tendency
• Mean, median, mode, geometric mean

Described 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

Discussed covariance and correlation coefficient

Addressed pitfalls in numerical descriptive measures and ethical

considerations
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 End of Chapter

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