CENTRAL

TENDENCY,
DISPERSION
Business (Session 3-4)
Analytics -1 By :
Dr. Madhu Iyengar

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 CENTRAL TENDENCY

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Topics covered

1. Introduction
2. Central tendency or the Average
3. Objectives of Averaging
4. Requisites of a Good Average
5. Types of Averages
6. Mathematical Averages
7. The Median
8. The Mode

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Introduction

Statistics & Descriptive Statistics

“To behold is to look beyond the fact; to observe, to go beyond the observation.
Look at the world of people, and you will be overwhelmed by what you see. But
select from that mass of humanity a well-chosen few, and observe them with
insight, and they will tell you more than all the multitudes together.”

“Descriptive or Univariate statistics are used to describe a particular sample or a

particular individual within a sample. The data are limited to describing only one
variable, group, or individual. Any conclusions that are made cannot be extended
to anyone outside that particular sample.”

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Central tendency or the Average

A single value that represents the characteristics of the entire available raw data is
called the Central tendency or the Average .
This also depicts the behavior of the data about the concentration of the values in
the central part of the distribution

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Objectives of Averaging

The objectives of averaging are:

1) To find out one value that represents the whole mass of data(Key Objective)
2) To enable comparison
3) To establish relationship
4) To derive inferences about a universe from a sample
5) To aid process of decision-making

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Requisites of A Good Average

Following are the characteristics of an ideal average. An average should be:

Rigidly defined
Mathematically expressed (Have a mathematical formula)
Readily comprehensible and easy to calculate
Calculated based on all the observations
Least affected by extreme fluctuations in sampling data.
Suitable for further mathematical treatment.
Retaining maximum characteristics of the data,
Nearest value to all the data elements.
calculated for homogeneous data i.e. ages, sales etc.
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Types of Averages

Out of these,
Arithmetic
Mean,
Median &
Mode are
the widely
used
Averages.

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Arithmetic Mean (Raw Data) – Definition, Formula &
Example
The Arithmetic mean or Mean is the most Example -
simple & frequently used average. Number of patients coming to the OPD of a
Arithmetic mean is represented by notation hospital per day.
x (read x - bar). Let following be the weekly record of patients
The mean x of a collection of observations visiting OPD in a hospital on each day of the
(raw data) x1 , x2 ,................., xn is given by: week:
Day1 Day2 Day3 Day4 Day5 Day6 Day7
x = (x1 + x2 + .................+ xn )/n 100 45 79 47 56 87 69
= Σx/n
The Mean of the observation is :
=
x=
n is the number of elements
= 110+ 45+ 79+ 47 + 56+ 87+69 /7
Σ (Sigma) - summation of values of x
= 69 Patients

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Arithmetic Mean (Continued)

For a frequency distribution

Mean = Σfx/Σf
Z = x2
For a Grouped Data (Class Interval Series)
Convex
Mean = YΣfm/Σf
=2x+3
Linear
m = class mark/mid-point of the interval

W=√X
Concave
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Mean Discrete Series

Sample Mean f fX
58 45 2610
64 42 2688
77 83 6391
62 38 2356
52 45 2340
N = 253 S fX = 16385

X = S fX/Nt

= 16385/253 = 64.76
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Weighted Mean

A Variant of Arithmetic Mean, weighted mean takes into consideration the relative
weight assigned to each of the values. Simple arithmetic mean assigns equal
weightage to all observed values.
Used for calculating stock price movements, goodwill of a company, market
capitalisation etc.

 WM = Σwx/Σw

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Weighted Average - Example
Product RoI Sales (Mn Rs) Weight RoI x W

A 10 400 0.20 2.00

B 30 200 0.10 3.00

C 5 900 0.45 2.25

D 20 500 0.25 5.00

Total 65 2000 1.00 12.25

Wt. Av.
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Magic of Compounding
Geometric Progressions (Recall)

Geometric Mean:
Popularly used for calculating growth over time
It is the nth root of the product of n numbers.
G M = (x1 * x2 *x3 * …..xn)^ 1/n

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Arithmetic Average V Geometric Average

Arithmetic Mean is appropriate for a single period return While Geometric Mean
is a better measure of Growth in wealth over time.
For Example: If the growth rate for the first year is 30% and for the second year it
is -10% then :
A.M = 0.5 x 30% - 0.5 x 10% = 10%( 30 + (-10))/ 2
G.M= [(1.30) (0.90)]1/2-1=8.2%

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Positional Averages- Median
 Median is the middle value of a series
in any order of magnitude
Median is the 50th percentile below
which 50% of the observations fall
Median divides the whole data set into
equal halves
Applicable for ordinal, interval, and
ratio data
Not applicable for nominal data
For ungrouped data
Median = (n+1/2)th item
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For Frequency Distribution
Median = (n+1/2)th item falling under
cumulative frequency.
Median is a Measure of Central Tendency
Middle Value In Ordered Sequence
o If Odd n, Middle Value of Sequence
o If Even n, Average of 2 Middle Values
Position of Median in Sequence (n + 1) /2
Not Affected by Extreme Values
17
Median Example
Odd-Sized Sample

Raw Data: 24.1 22.6 21.5 23.7 22.8

Ordered: 21.5 22.6 22.8 23.7 24.1
Position: 1 2 3 4 5

n +1 5 +1
Positioning Point    3
2 2

Median = 22.8

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Median Example
Even-Sized Sample

Raw Data: 10.3 4.98.911.7 6.37.7

Ordered: 4.96.37.78.910.3 11.7
Position: 1 2 3 4 5 6
n +1 6 +1
Positioning Point    3.5
2 2

7.7 + 8.9
Median   8.3
2

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Median - frequency distribution

E.g., A Quants class received the following marks out of 20 on their first exam.

X freq Cumulative freq

10 3 3
11 2 5
12 4 9
14 1 10
16 2 12 19 2 14
20 1 15

What is the median grade?

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Median for Class Interval Series

N
 cfp
Median  L  2 W 
fmed
Where:
L  the lower limit of the median class
cfp = cumulative frequency of class preceding the median class
fmed = frequency of the median class
W = width of the median class
N = total of frequencies

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Exercise

For a class consisting of 60 students, a test on English was conducted. The marks
obtained by the students are given below:
What is the mean & median marks obtained by the students in the class?

Marks obtained out of Numbers of

125 students
5 - 25 7
25 - 45 15
45 - 65 18
65 - 85 12
85 -105 6
105 -125 2
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Mode
Measure of Central Tendency
Value That Occurs Most Often
Not Affected by Extreme Values
May Be No Mode or Several Modes
May Be Used for Numerical &
Categorical Data
Applicable to all levels of data
measurement
o nominal, ordinal, interval, and ratio
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The mode is the most frequently
occurring number in a set of data.
Example - Find the mode of the
following numbers…
o 15, 20, 21, 23, 23, 23, 25, 27, 30
Also, if there are two modes, the data
set is bimodal.
If there are more than two modes, the
data set is said to be multimodal.
In a class interval series, mode is
calculated as: l + {(f-f1)/2f - f1- f2}*i
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Exercise

Find the mode for the class interval series given

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Relationship between mean median and mode

For a symmetrical distribution:

Mean = Median = Mode
For moderately asymmetrical distribution:
Mode = 3 Median - 2 Mean
This is also called empirical mode

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Thinking Challenge

You’re a financial analyst. You have collected the following closing stock prices
of new stock issues: 17, 16, 21, 18, 13, 16, 12, 11.
Describe the stock prices in terms of central tendency.

Solution:
Mean
x = = (x1 + x1 + …………… + xn)/n
= (17 + 16 + 21 + 18 + 13 + 16 + 12 + 11)/8
= 15.5

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Central Tendency Solution

Median
Raw Data: 17 16 21 18 13 16 12 11
Ordered: 11 12 13 16 16 17 18 21
Position: 1 2 3 4 5 6 7 8

Positioning point = (n + 1)/2=(8 + 1)/2 = 4.5

Median = (16 + 16)/2 = 16

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Central Tendency Solution

Raw Data: 17 16 21 18 13 16 12 11
Ordered: 11 12 13 16 16 17 18 21
Mode
( Most frequently occurring number in a set of data)

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Summary of Central Tendency Measures

Measure Equation Description

Mean  X / n Balance Point
i
Median (n+1) Position Middle Value
2 When Ordered
Mode none Most Frequent

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 MEASURES OF DISPERSION

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Topics Covered

1. Dispersion
2. Range
3. Standard Deviation and Variance
4. Standard Deviation & Normal Curves
5. Coefficient of Variation
6. Properties of Standard Deviation

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Dispersion

The degree to which the numerical data tend to spread about an average value
Measures of variability describe the spread or the dispersion of a set of data.
Measure of variability of data
Two types
Absolute – expressed in terms of original data
Relative- in terms of %

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Range

Absolute Measure:
Highest value – Lowest Value
Takes into account only the extreme values

Relative Measure
Coefficient of Range = Highest – Lowest/(Highest + Lowest)

Used in quality control of products

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Variability

No Variability in Cash Flow (same amounts) Mean

Mean

Variability in Cash Flow (different amounts) Mean

Mean

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Variability

Variability

No Variability

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Standard Deviation

The Standard Deviation is a number that measures how far away each number in a
set of data is from their mean.
If the Standard Deviation is large it means the numbers are spread out from their
mean.

If the Standard Deviation is small it means the numbers are close to their mean

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Standard Deviation of Population

  X    2


2

X - m X 
2

 N
130
5 -8 64 
9 -4 16
5
16 +3 9  26.0
17 +4 16

2

18 +5 25
0 130  26.0
 5. 1
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Calculation of Standard Deviation

The standard deviation (SD) is the square root of the variance

-SD is the square root of the average squared deviation from the mean
-SD has the same units as the mean and the original observations
-SD is the principle calculation used to measure dispersion of results around a
mean
-Popularly called root mean square deviation

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Calculation of Standard Deviation for a sample

bbbb

s
 (X i X) 2

 variance
n 1

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Degrees of Freedom

Represents the number of independent comparisons that can be made among a

series of observations.
The mean is calculated first, so the variance calculation has lost one degree of
freedom
(n-1)

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 72
76
Here are the scores 80
on the math quiz for
Team A: 80 Average:
81 81.5
83
84
85
85
89
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The Standard Deviation measures how far away each number in a set of data is from their
mean.
For example, start with the lowest score, 72. How far away is 72 from the mean of 81.5?

72 - 81.5 = - 9.5

- 9.5

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 Distance from Mean

72 -9.5
76
80
So, the first step 80
to finding the
Standard 81
Deviation is to 83
find all the
distances from the 84
mean. 85
85
89 7.5
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 Distance from
Mean

72 - 9.5
76 - 5.5
80 - 1.5
So, the first step - 1.5
to finding the 80
Standard 81 - 0.5
Deviation is to
find all the 83 1.5
distances from the 84 2.5
mean.
85 3.5
85 3.5
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89 7.5
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 Distance Distances
from Mean Squared

72 - 9.5 90.25
76 - 5.5 30.25
80 - 1.5
Next, you need to 80 - 1.5
square each of the 81 - 0.5
distances to turn
them all into 83 1.5
positive numbers 2.5
84
85 3.5
85 3.5
89 7.5
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 Distance Distances
from Mean Squared
72 - 9.5 90.25
76 - 5.5 30.25
80 - 1.5 2.25
Next, you need to 80 - 1.5 2.25
square each of the - 0.5 0.25
distances to turn them
81
all into positive 83 1.5 2.25
numbers
84 2.5 6.25
85 3.5 12.25
85 3.5 12.25
89 7.5 56.25
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 Distance
from Mean Distances
Squared

72 - 9.5 90.25
76 - 5.5 30.25
Sum:
80 - 1.5 2.25 214.5
80 - 1.5 2.25
Add up all of the 81 - 0.5 0.25
distances
83 1.5 2.25
84 2.5 6.25
85 3.5 12.25
85 3.5 12.25
89 7.5 56.25
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 Distance
from Mean Distances
Squared

72 - 9.5 90.25
76 - 5.5 30.25
Sum:
80 - 1.5 2.25 214.5
Divide by (n - 1) 80 - 1.5 2.25 (10 - 1)
where n
represents the 81 - 0.5 0.25
= 23.8
amount of 1.5 2.25
numbers you
83
have. 84 2.5 6.25
85 3.5 12.25
85 3.5 12.25
89 7.5 56.25
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 Distance
from Mean Distances
Squared

72 - 9.5 90.25
76 - 5.5 30.25
Sum:
80 - 1.5 2.25 214.5
Finally, take the
Square Root of 80 - 1.5 2.25 (10 - 1)
the average 81 - 0.5 0.25
distance = 23.8
83 1.5 2.25
= 4.88
84 2.5 6.25
85 3.5 12.25
85 3.5 12.25
89 7.5 56.25
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 Distance
from Mean Distances
Squared

57 - 24.5 600.25
65 - 16.5 272.25
Sum:
83 1.5 2.25 2280.5
94 12.5 156.25 (10 - 1)
Now find the 95 13.5 182.25
Standard = 253.4
Deviation for the 96 14.5 210.25
other class grades = 15.91
98 16.5 272.25
93 11.5 132.25
71 - 10.5 110.25
63 -18.5 342.25
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Comparative View

Team A Team B

Average on
the Quiz 81.5 81.5
Standard
Deviation 4.88 15.91
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The Empirical Rule & Normal Distribution

Dark blue is less than one standard deviation from the mean. For the normal distribution,
this accounts for about 68% of the set (dark blue) while two standard deviations from the
mean (medium and dark blue) account for about 95% and three standard deviations (light,
medium, and dark blue) account for about 99.7%.
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Applications

Indicator of financial risk

Quality Control
o construction of quality control charts
o process capability studies
Comparing populations
o household incomes in two cities
o employee absenteeism at two plants

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Properties of the Standard Deviation

The greater the spread, the larger the s.

s ≥ 0.
s = 0 when all the observations take the same value.
s can be influenced by outliers.
The value of s remains the same if in a series each of the observation is increased
or decreased by a constant quantity
The value of s is similarly affected if in a data set each observation is multiplied
or divided by a constant quantity.
 s is the minimum root-mean-square deviation.

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The Coefficient of Variation

The coefficient of variation is a measure of relative variability

It is the only measure of dispersion which is relative every other being absolute
It is used to measure the changes that have taken place in a population over time
It is used to compare the variability of two populations that are expressed in
different units of measurement
In financial parlance, it is popularly called risk per unit of return.
Formula: C.V = (S.D / Mean ) x 100

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Coefficient of Variation

The Coefficient of Variation (CV) is the standard Deviation (SD) expressed as a

percentage of the mean
-Also known as Relative Standard deviation (RSD)
CV % = (SD ÷ mean) x 100

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 An Illustration

Given Dividends on equity stocks of A Ltd and B Ltd, Which of the Company’s share is
better if the investor is assumed to be rational?

Year A Ltd (%) B Ltd. (%)

2013 12.5 18 Solution:

2014 20 15
2015 20 15 Mean 15.42% 13.83%
2016 15 15 SD 4.01 % 3.19%
2017 10 10
2018 15 10 CV 26.01 % 23.07%

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Comparative Analysis & Conclusion

Such questions are best answered by the relative measure of dispersion . One
Company’s stock may be giving you a better return but as we all know for higher
returns higher risk is to be taken. Risk and return go hand in hand. Therefore, an
ideal method would be to compare the risk per unit of return of each of the
company’s stock.

Conclusion :
Stock B is better than Stock A as the former is more consistent , reliable and less
risky per unit of return

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Quiz Time – Use Scientific Calculator
Then Confirm with Excel Formula function

Compute the coefficient of variation for the following sample data :

32 41 36 24 29 30 40 22 25 37

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Class Room Illustrations
Suppose that you make a fixed deposit of $1,000 in Bank X, and $500 in Bank Y. The value of each investment
at the end of each subsequent year is provided in the table

Year Bank X ($) Bank Y ($)

1 1,320 560
2 1,510 620
3 1,750 680
4 2,090 740
5 2,240 790
6 2,470 820
7 2,830 870
8 3,220 910
9 3,450 950
10 3,690 990

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Solution :
Year Bank X Growth Factor Bank Y Growth Factor
1,000 500
1 1,320 1.32 560 1.12
2 1,510 1.14 620 1.11
3 1,750 1.16 680 1.10
4 2,090 1.19 740 1.09
5 2,240 1.07 790 1.07
6 2,470 1.10 820 1.04
7 2,830 1.15 870 1.06
8 3,220 1.14 910 1.05
9 3,450 1.07 950 1.04
10 3,690 1.07 990 1.04

Geometric
1.1395 Geometric Mean 1.0707
Mean
% of return 13.95% % of return 7.07%

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Quiz Time : Calculate Geometric Mean
Stivers Trippi

Year End of Year Value Growth Factor End of Year Value Growth Factor

0 $10,000 $5,000
1 $11,000 1.100 $5,600 1.120
2 $12,000 1.091 $6,300 1.125
3 $13,000 1.083 $6,900 1.095
4 $14,000 1.077 $7,600 1.101
5 $15,000 1.071 $8,500 1.118
6 $16,000 1.067 $9,200 1.082
7 $17,000 1.063 $9,900 1.076
8 $18,000 1.059 $10,600 1.071

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 Some Basic Excel Exercises – For performing analysis
1. The following table provides information on the number of billionaires in a country and the
continents on which these countries are located.
Nationality Continent Number of Billionaires
United States North America 426
Brazil South America 38
Russia Europe 105
Mexico North America 37
India Asia 54
Turkey Europe 40
United Kingdom Europe 31
Hong Kong Asia 39
Germany Europe 57
Canada North America 28
China Asia 120
a. Sort the countries from largest to smallest based on the number of billionaires. What are the top 5 countries according to the
number of billionaires?
b. Filter the countries to display only the countries located in North America.

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 Any Queries ?

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References

Business Statistics for contemporary decision making – Ken Black

Business Analytics – Cengage
OERs on the quicforce

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During the 1990s, Mattel merged with the Fisher-Price company (1993) and acquired Tyco Toys
(1997), the third-largest manufacturer of toys at that time. The Fisher-Price deal made Mattel
overpower Hasbro and become the leading toy company. The deal was, referred to as, the
most significant acquisition in the toy industry; since the acquisition of Tonka Corp., by Hasbro
in 1991. However, as competition in the toy industry was intense, the sales at Mattel slumped
in 1996 and 1997

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 Top Toy brands????? Popularity in India????

1.Fisher-Price
2.Hot Wheels. (Hot Wheels is considered one of the best toys manufacturing
companies in India)
3.Funskool (India) Ltd.
4.Lego
5.Mattel Inc
6.MEGA Bloks
7.K'nex
8.Chicco

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