PowerPoint CH 03b

Fundamentals
of Business
Statistics
6E
Slides by
John
Loucks
Sweeney
St. Edward’s
Williams University
Anderson
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
1
or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Part B
Descriptive Statistics: Numerical Measures
 Measures of Distribution Shape, Relative Location,
and Detecting Outliers
 Exploratory Data Analysis
 Measures of Association Between Two Variables
 The Weighted Mean and
Working with Grouped Data
Slide
2
Measures of Distribution Shape,
Relative Location, and Detecting Outliers
 Distribution Shape
 z-Scores
 Chebyshev’s Theorem
 Empirical Rule
 Detecting Outliers
Slide
3
Distribution Shape: Skewness
 An important measure of the shape of a distribution
is called skewness.
 The formula for the skewness of sample data is
3
n 
x 
x

(
n1)(
n2

Skewness
 
 
i
) s
 Skewness can be easily computed using statistical
software.
Slide
4
 Symmetric (not skewed)
• Skewness is zero.
• Mean and median are equal.
.35
Skewness = 0
.30
Relative Frequency
.25
.20
.15
.10
.05
0
Slide
5
 Moderately Skewed Left
• Skewness is negative.
• Mean will usually be less than the median.
.35
Skewness = - .31
.30
Relative Frequency
.25
.20
.15
.10
.05
0
Slide
6
 Moderately Skewed Right
• Skewness is positive.
• Mean will usually be more than the median.
.35
Skewness = .31
.30
Relative Frequency
.25
.20
.15
.10
.05
0
Slide
7
 Highly Skewed Right
• Skewness is positive (often above 1.0).
• Mean will usually be more than the median.
.35
Skewness = 1.25
.30
Relative Frequency
.25
.20
.15
.10
.05
0
Slide
8
 Example: Apartment Rents
Seventy efficiency apartments were randomly
sampled in a college town. The monthly rent prices
for the apartments are listed below in ascending order.
425 430 430 435 435 435 435 435 440 440
440 440 440 445 445 445 445 445 450 450
450 450 450 450 450 460 460 460 465 465
465 470 470 472 475 475 475 480 480 480
480 485 490 490 490 500 500 500 500 510
510 515 525 525 525 535 549 550 570 570
575 575 580 590 600 600 600 600 615 615
Slide
9
.35 Skewness = .92

.30
Relative Frequency
.25
.20
.15
.10
.05
0
Slide
10
z-Scores
The
The z-score
z-score is
is often
often called
called the
the standardized
standardized value.
value.
ItIt denotes
denotes thethe number
number of
of standard
standard deviations
deviations aa data
data
value
value xxii is
is from
from the
the mean.
mean.
xi x
zi 
s
Excel’s
Excel’s STANDARDIZE
STANDARDIZE function
function can
can be
be used
used to
to
compute
compute the
the z-score.
z-score.
Slide
11
z-Scores
 An observation’s z-score is a measure of the relative

location of the observation in a data set.
 A data value less than the sample mean will have a
z-score less than zero.
 A data value greater than the sample mean will have
a z-score greater than zero.
 A data value equal to the sample mean will have a
z-score of zero.
Slide
12
z-Scores

z-Score of Smallest Value (425)
xi  x 425  490.80
z    1.20
s 54.74
Standardized Values for Apartment Rents

-1.20 -1.11 -1.11 -1.02 -1.02 -1.02 -1.02 -1.02 -0.93 -0.93
-0.93 -0.93 -0.93 -0.84 -0.84 -0.84 -0.84 -0.84 -0.75 -0.75
-0.75 -0.75 -0.75 -0.75 -0.75 -0.56 -0.56 -0.56 -0.47 -0.47
-0.47 -0.38 -0.38 -0.34 -0.29 -0.29 -0.29 -0.20 -0.20 -0.20
-0.20 -0.11 -0.01 -0.01 -0.01 0.17 0.17 0.17 0.17 0.35
0.35 0.44 0.62 0.62 0.62 0.81 1.06 1.08 1.45 1.45
1.54 1.54 1.63 1.81 1.99 1.99 1.99 1.99 2.27 2.27
Slide
13
Chebyshev’s Theorem
At
At least
least (1
(1 -- 1/z
1/z22)) of
of the
the items
items in
in any
any data
data set
set will
will be
be
within
within zz standard
standard deviations
deviations of
of the
the mean,
mean, where
where zz is
is
any
any value
value greater
greater thanthan 1.
1.
Chebyshev’s
Chebyshev’s theorem
theorem requires
requires zz >> 1,
1, but
but zz need
need not
not
be
be an
an integer.
integer.
Slide
14
At least 75% of
At least of the
the data
data values
values must
must be
be
within z = 2 standard deviations of
within of the
the mean.
mean.
At least 89% of
At least of the
the data
data values
values must
must be
be
within of the
the mean.
mean.
At least 94% of
At least of the
the data
data values
values must
must be
be
within of the
the mean.
mean.
Slide
15

Let z = 1.5 with x = 490.80 and s = 54.74
At least (1 - 1/(1.5)2) = 1 - 0.44 = 0.56 or 56%

of the rent values must be between
x - z(s) = 490.80 - 1.5(54.74) = 409
and
x + z(s) = 490.80 + 1.5(54.74) = 573
(Actually, 86% of the rent values

are between 409 and 573.)
Slide
16
Empirical Rule
When the data are believed to approximate a

bell-shaped distribution …
The
The empirical
empirical rule
rule can
can be
be used
used to
to determine
determine the
the
percentage
percentage of
of data
data values
values that
that must
must be
be within
within aa
specified
specified number
number ofof standard
standard deviations
deviations of
of the
the
mean.
mean.
The
The empirical
empirical rule
rule is
is based
based on
on the
the normal
normal
distribution,
distribution, which
which is
is covered
covered in
in Chapter
Chapter 6.
6.
Slide
17
Empirical Rule
For data having a bell-shaped distribution:
68.26% of
of the
the values
values of
of aa normal
normal random
random variable
variable
are within +/- 1 standard deviation of
are within of its
its mean.
mean.
95.44% of
of the
the values
values of
of aa normal
normal random
random variable
variable
are within +/- 2 standard deviations of
are within of its
its mean.
mean.
99.72% ofof the

the values
values of
of aa normal
normal random
random variable
variable
are within +/- 3 standard deviations of
are within of its
its mean.
mean.
Slide
18
Empirical Rule
99.72%
95.44%
68.26%
m
x
m – 3s m – 1s m + 1s m + 3s
m – 2s m + 2s
Slide
19
Detecting Outliers
 An outlier is an unusually small or unusually large

value in a data set.
 A data value with a z-score less than -3 or greater
than +3 might be considered an outlier.
 It might be:
• an incorrectly recorded data value
• a data value that was incorrectly included in the
data set
• a correctly recorded data value that belongs in
the data set
Slide
20
Detecting Outliers

• The most extreme z-scores are -1.20 and 2.27
• Using |z| > 3 as the criterion for an outlier, there
are no outliers in this data set.
Standardized Values for Apartment Rents

-1.20 -1.11 -1.11 -1.02 -1.02 -1.02 -1.02 -1.02 -0.93 -0.93
-0.93 -0.93 -0.93 -0.84 -0.84 -0.84 -0.84 -0.84 -0.75 -0.75
-0.75 -0.75 -0.75 -0.75 -0.75 -0.56 -0.56 -0.56 -0.47 -0.47
-0.47 -0.38 -0.38 -0.34 -0.29 -0.29 -0.29 -0.20 -0.20 -0.20
-0.20 -0.11 -0.01 -0.01 -0.01 0.17 0.17 0.17 0.17 0.35
0.35 0.44 0.62 0.62 0.62 0.81 1.06 1.08 1.45 1.45
1.54 1.54 1.63 1.81 1.99 1.99 1.99 1.99 2.27 2.27
Slide
21
Exploratory Data Analysis
Exploratory
Exploratory data
data analysis
analysis procedures
procedures enable
enable us
us to
to use
use
simple
simple arithmetic
arithmetic and
and easy-to-draw
easy-to-draw pictures
pictures to
to
summarize
summarize data.
data.
We
We simply
simply sort
sort the
the data
data values
values into
into ascending
ascending order
order
and
and identify
identify the
the five-number
five-number summary
summary and and then
then
construct
construct aa box
box plot.
plot.
Slide
22
Five-Number Summary
1 Smallest Value
2 First Quartile
3 Median
4 Third Quartile
5 Largest Value
Slide
23
Five-Number Summary

Lowest Value = 425 First Quartile = 445
Median = 475
Third Quartile = 525 Largest Value = 615
425 430 430 435 435 435 435 435 440 440
440 440 440 445 445 445 445 445 450 450
450 450 450 450 450 460 460 460 465 465
465 470 470 472 475 475 475 480 480 480
480 485 490 490 490 500 500 500 500 510
510 515 525 525 525 535 549 550 570 570
575 575 580 590 600 600 600 600 615 615
Slide
24
Box Plot
A
A box
box plot
plot is
is aa graphical
graphical summary
summary of
of data
data that
that is
is
based
based on
on aa five-number
five-number summary.
summary.
A
A key
key to
to the
the development
development of of aa box
box plot
plot is
is the
the
computation
computation of of the
the median
median and
and the
the quartiles
quartiles Q Q11 and
and
Q
Q33..
Box
Box plots
plots provide
provide another
another way
way to
to identify
identify outliers.
outliers.
Slide
25
Box Plot

• A box is drawn with its ends located at the first and
third quartiles.
• A vertical line is drawn in the box at the location of
the median (second quartile).
400 425 450 475 500 525 550 575 600 625
Q1 = 445 Q3 = 525
Q2 = 475
Slide
26
Box Plot
 Limits are located (not drawn) using the interquartile

range (IQR).
 Data outside these limits are considered outliers.
 The locations of each outlier is shown with the
symbol * .
continued
Slide
27
Box Plot

• The lower limit is located 1.5(IQR) below Q1.
Lower Limit: Q1 - 1.5(IQR) = 445 - 1.5(80) = 325
• The upper limit is located 1.5(IQR) above Q3.

Upper Limit: Q3 + 1.5(IQR) = 525 + 1.5(80) = 645
• There are no outliers (values less than 325 or

greater than 645) in the apartment rent data.
Slide
28
Box Plot

Whiskers (dashed lines) are drawn from the ends
of the box to the smallest and largest data values
inside the limits.
400 425 450 475 500 525 550 575 600 625
Smallest value Largest value

inside limits = 425 inside limits = 615
Slide
29
Box Plot
An excellent graphical technique for making

comparisons among two or more groups.
Slide
30
Measures of Association
Between Two Variables
Thus
Thus far
far we
we have
have examined
examined numerical
numerical methods
methods usedused
to
to summarize
summarize the
the data
data for
for one
one variable
variable at
at aa time.
time.
Often
Often aa manager
manager or
or decision
decision maker
maker is
is interested
interested in
in
the
the relationship
relationship between
between two
two variables.
variables.
Two
Two descriptive
descriptive measures
measures of
of the
the relationship
relationship
between
between two
two variables
variables are
are covariance
covariance andand correlation
correlation
coefficient.
coefficient.
Slide
31
Covariance
The
The covariance
covariance is
is aa measure
measure of
of the
the linear
linear association
association
between
between two
two variables.
variables.
Positive
Positive values
values indicate
indicate aa positive
positive relationship.
relationship.
Negative
Negative values
values indicate
indicate aa negative
negative relationship.
relationship.
Slide
32
Covariance
The
The covariance
covariance is
is computed
computed as
as follows:
follows:
 ( xi  x )( yi  y ) for
sxy 
n 1 samples
 ( xi   x )( yi   y ) for
 xy  populations
N
Slide
33
Correlation Coefficient
Correlation
Correlation is
is aa measure
measure of
of linear
linear association
association and
and not
not
necessarily
necessarily causation.
causation.
Just
Just because
because two
two variables
variables are
are highly
highly correlated,
correlated, itit
does
does not
not mean
mean that
that one
one variable
variable is
is the
the cause
cause of
of the
the
other.
other.
Slide
34
The
The correlation
correlation coefficient
coefficient is
is computed
computed as
as follows:
follows:
sxy  xy
rxy   xy 
sx s y  x y
for for
samples populations
Slide
35
The
The coefficient
coefficient can
can take
take on
on values
values between
between -1
-1 and
and +1.
+1.
Values
Values near
near -1
-1 indicate
indicate aa strong
strong negative
negative linear
linear
relationship.
relationship.
Values
Values near
near +1
+1 indicate
indicate aa strong
strong positive
positive linear
linear
relationship.
relationship.
The
The closer
closer the
the correlation
correlation is
is to
to zero,
zero, the
the weaker
weaker the
the
relationship.
relationship.
Slide
36
Covariance and Correlation Coefficient
 Example: Golfing Study

A golfer is interested in investigating the
relationship, if any, between driving distance and
18-hole score.
Average Driving Average
Distance (yds.) 18-Hole Score
277.6 69
259.5 71
269.1 70
267.0 70
255.6 71
272.9 69
Slide
37
x y ( xi  x ) ( yi  y ) (xi  x)(yi  y)
277.6 69 10.65 -1.0 -10.65
259.5 71 -7.45 1.0 -7.45
269.1 70 2.15 0 0
267.0 70 0.05 0 0
255.6 71 -11.35 1.0 -11.35
272.9 69 5.95 -1.0 -5.95
Average 267.0 70.0 Total -35.40
Std. Dev. 8.2192 .8944
Slide
38

• Sample Covariance
sxy 
 (x  x )( y  y ) 35.40
i i
   7.08
n1 61
• Sample Correlation Coefficient
sxy 7.08
rxy    -.9631
sx sy (8.2192)(.8944)
Slide
39
The Weighted Mean and
Working with Grouped Data
 Weighted Mean
 Mean for Grouped Data
 Variance for Grouped Data
 Standard Deviation for Grouped Data
Slide
40
Weighted Mean
 When the mean is computed by giving each data

value a weight that reflects its importance, it is
referred to as a weighted mean.
 In the computation of a grade point average (GPA),
the weights are the number of credit hours earned for
each grade.
 When data values vary in importance, the analyst
must choose the weight that best reflects the
importance of each value.
Slide
41
Weighted Mean
x
 wx i i
w i
where:
xi = value of observation i
wi = weight for observation i
Slide
42
Grouped Data
 The weighted mean computation can be used to

obtain approximations of the mean, variance, and
standard deviation for the grouped data.
 To compute the weighted mean, we treat the
midpoint of each class as though it were the mean
of all items in the class.
 We compute a weighted mean of the class midpoints
using the class frequencies as weights.
 Similarly, in computing the variance and standard
deviation, the class frequencies are used as weights.
Slide
43
Mean for Grouped Data
 Sample Data
x  fM i i
 Population Data
  fM i i
N
where:
fi = frequency of class i
Mi = midpoint of class i
Slide
44
Sample Mean for Grouped Data

The previously presented sample of apartment
rents is shown here as grouped data in the form of
a frequency distribution. Rent ($) Frequency
420-439 8
440-459 17
460-479 12
480-499 8
500-519 7
520-539 4
540-559 2
560-579 4
580-599 2
600-619 6
Slide
45
Sample Mean for Grouped Data
Rent ($) fi Mi f iMi

420-439 8 429.5 3436.0 34, 525
x  493.21
440-459 17 449.5 7641.5 70
460-479 12 469.5 5634.0 This approximation
480-499 8 489.5 3916.0
differs by $2.41 from
500-519 7 509.5 3566.5
520-539 4 529.5 2118.0 the actual sample
540-559 2 549.5 1099.0 mean of $490.80.
560-579 4 569.5 2278.0
580-599 2 589.5 1179.0
600-619 6 609.5 3657.0
Total 70 34525.0
Slide
46
Variance for Grouped Data
 For sample data
 f i ( Mi  x ) 2
s 
2
n 1
 For population data
 f i ( M i   ) 2
2 
N
Slide
47
Sample Variance for Grouped Data
Rent ($) fi Mi Mi - x (M i - x )2 f i (M i - x )2
420-439 8 429.5 -63.7 4058.96 32471.71
440-459 17 449.5 -43.7 1910.56 32479.59
460-479 12 469.5 -23.7 562.16 6745.97
480-499 8 489.5 -3.7 13.76 110.11
500-519 7 509.5 16.3 265.36 1857.55
520-539 4 529.5 36.3 1316.96 5267.86
540-559 2 549.5 56.3 3168.56 6337.13
560-579 4 569.5 76.3 5820.16 23280.66
580-599 2 589.5 96.3 9271.76 18543.53
600-619 6 609.5 116.3 13523.36 81140.18
Total 70 208234.29
continued
Slide
48
Sample Variance for Grouped Data

• Sample Variance
s2 = 208,234.29/(70 – 1) = 3,017.89
• Sample Standard Deviation

s  3,017.89  54.94
This approximation differs by only $.20

from the actual standard deviation of $54.74.
Slide
49
End of Chapter 3, Part B
Slide
50

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Fundamentals

.35 Skewness = .92

 An observation’s z-score is a measure of the relative

 Example: Apartment Rents

Standardized Values for Apartment Rents

 Example: Apartment Rents

At least (1 - 1/(1.5)2) = 1 - 0.44 = 0.56 or 56%

(Actually, 86% of the rent values

When the data are believed to approximate a

For data having a bell-shaped distribution:

99.72% ofof the

 An outlier is an unusually small or unusually large

 Example: Apartment Rents

Standardized Values for Apartment Rents

 Example: Apartment Rents

 Example: Apartment Rents

 Limits are located (not drawn) using the interquartile

 Example: Apartment Rents

• The upper limit is located 1.5(IQR) above Q3.

• There are no outliers (values less than 325 or

 Example: Apartment Rents

Smallest value Largest value

An excellent graphical technique for making

 Example: Golfing Study

 Example: Golfing Study

 Example: Golfing Study

 When the mean is computed by giving each data

 The weighted mean computation can be used to

 Example: Apartment Rents

 Example: Apartment Rents

Rent ($) fi Mi f iMi

 For sample data

 For population data

 Example: Apartment Rents

 Example: Apartment Rents

• Sample Standard Deviation

This approximation differs by only $.20

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