Statistics for Business and

Economics

Chapter3
Numerical Measures

© 2011 Pearson Education, Inc

 Contents

1. Describing Qualitative Data

2. Graphical Methods for Describing
Quantitative Data
3. Summation Notation
4. Numerical Measures of Central Tendency
5. Numerical Measures of Variability
6. Interpreting the Standard Deviation
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 Contents

7. Numerical Measures of Relative Standing

8. Methods for Detecting Outliers: Box Plots
and z-scores
9. Graphing Bivariate Relationships
10. The Time Series Plot
11. Distorting the Truth with Descriptive
Techniques

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 Learning Objectives

1. Describe data using graphs

2. Describe data using numerical measures

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Summation Notation

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 Summation Notation
Most formulas we use require a summation of numbers.

x i
i1

Sum the measurements on the variable that appears to the

right of the summation symbol, beginning with the 1st
measurement and ending with the nth measurement.

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 Summation Notation
For the data x1  5, x2  3, x3  8, x4  5, x5  4

i 1 2 3 4 5
x 2
 x 2
 x 2
 x 2
 x 2
 x 2

i1

5 3 8 5 4
2 2 2 2 2

 25  9  64  25  16  139

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Numerical Measures
of Central Tendency

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 Thinking Challenge

$400,000

$70,000

$50,000 ... employees cite low pay --

most workers earn only
$30,000 $20,000.
... President claims average
$20,000 pay is $70,000!
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 Two Characteristics
The central tendency of the set of
measurements–that is, the tendency of the data to
cluster, or center, about certain numerical values.

Central Tendency
(Location)

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 Two Characteristics
The variability of the set of measurements–that
is, the spread of the data.

Variation
(Dispersion)

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 Standard Notation
Measure Sample Population
Mean X 

Size n N

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 Mean
1. Most common measure of central tendency
2. Acts as ‘balance point’
3. Affected by extreme values (‘outliers’)
4. Denoted x where
n
x i x 1  x 2 … x n
i 1
x  
n n
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 Mean Example
Raw Data: 10.3 4.9 8.9 11.7 6.3 7.7
n

x i x1x2 x 3 x 4 x 5 x6
i 1
x  
n 6
10 .3  4.9  8.9  11.7  6.3  7.7

6
 8.30
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 Median
1. Measure of central tendency
2. Middle value in ordered sequence
• If n is odd, middle value of sequence
• If n is even, average of 2 middle values
3. Position of median in sequence
n 1
Positioning Point 
2
4. Not affected by extreme values
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 Median Example
Odd-Sized Sample
• Raw Data: 24.1 22.6 21.5 23.7 22.6
• Ordered: 21.5 22.6 22.6 23.7 24.1
• Position: 1 2 3 4 5

n 1 5 1
Positioning Point    3.0
2 2
Median  22 .6
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 Median Example
Even-Sized Sample
• Raw Data: 10.3 4.9 8.9 11.7 6.3 7.7
• Ordered: 4.9 6.3 7.7 8.9 10.3 11.7
• Position: 1 2 3 4 5 6

n 1 6 1
Positioning Point    3.5
2 2
7.7  8.9
Median   8.30
2
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 Mode
1. Measure of central tendency
2. Value that occurs most often
3. Not affected by extreme values
4. May be no mode or several modes
5. May be used for quantitative or qualitative
data

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 Mode Example
• No Mode
Raw Data: 10.3 4.9 8.9 11.7 6.3 7.7
• One Mode
Raw Data: 6.3 4.9 8.9 6.3 4.9 4.9
• More Than 1 Mode
Raw Data: 21 28 28 41 43 43

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 Thinking Challenge
You’re a financial analyst
for Prudential-Bache
Securities. 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.
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 Central Tendency Solution*
Mean
n

x i x 1  x 2 … x 8
x  i 1

n 8
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
n 1 8 1
Positioning Point    4.5
2 2
16  16
Median   16
2
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 Central Tendency Solution*

Mode
Raw Data: 17 16 21 18 13 16 12 11

Mode = 16

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 Summary of
Central Tendency Measures
Measure Formula Description
Mean x i / n Balance Point
Median (n+1) Middle Value
Position
2 When Ordered
Mode none Most Frequent

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 Shape
1. Describes how data are distributed
2. Measures of Shape
• Skew = Symmetry

Left-Skewed Symmetric Right-Skewed

Mean Median Mean = Median Median Mean

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AM vs. GM

https://www.investopedia.
com/ask/answers/06/geom
etricmean.asp

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 2.5

Numerical Measures
of Variability

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 Range
1. Measure of dispersion
2. Difference between largest & smallest
observations
Range = xlargest – xsmallest
3. Ignores how data are distributed

7 8 9 10 7 8 9 10
Range = 10 – 7 = 3 Range = 10 – 7 = 3
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 Variance &
Standard Deviation
1. Measures of dispersion
2. Most common measures
3. Consider how data are distributed
4. Show variation about mean (x or μ)

x = 8.3

4 6 8 10 12
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 Standard Notation
Measure Sample Population
Mean x 
Standard
Deviation
s 
2 2
Variance s 
Size n N
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Sample Variance Formula
n

 x  x
2
i
s2  i1
n 1


x1  x   x2  x 
2 2
 L  xn  x 
2

 n 1

n – 1 in denominator!

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Sample Standard Deviation
Formula

s  s2
n

 x  x
2
i
 i1
n 1


x1  x   x2  x 
2 2
 L  xn  x 
2

 n 1

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 Variance Example
Raw Data: 10.3 4.9 8.9 11.7 6.3 7.7

n n

 (x i  x )
2

2
x i
i 1 i 1
s  where x   8.3
n 1 n

(
10 .3  8.3 )  (4.9  8.3 )  …  (7.7  8.3 )
2 2 2
2
s 
6 1
 6.368
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 Thinking Challenge
• You’re a financial analyst
for Prudential-Bache
Securities. You have
collected the following
closing stock prices of
new stock issues: 17, 16,
21, 18, 13, 16, 12, 11.
• What are the variance
and standard deviation
of the stock prices?

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 Variation Solution*
Sample Variance
Raw Data: 17 16 21 18 13 16 12 11

n n

 (x i  x )
2
x i
2 i 1 i 1
s  where x   15 .5
n 1 n
(
17  15 .5 )  (16  15 .5 )  …  (11  15 .5 )
2 2 2
2
s 
8 1
 11.14
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 Variation Solution*

Sample Standard Deviation

 x  x
2
i
s  s2  i1
 11.14  3.34
n 1

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 Summary of
Variation Measures
Measure Formula Description
Range X largest – X smallest Total Spread
Standard Deviation n Dispersion about
 x  x 
2
(Sample) i Sample Mean
i1
n 1
n

 x  µ  Dispersion about
2
Standard Deviation
i x
(Population) i1 Population Mean
N
n

 x  x 
2
Variance i Squared Dispersion
(Sample) i1 about Sample Mean
n 1
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•Take three numbers: 1, 2 and 3.
•Mean value is 2
•Differences between values and a mean are:
•1-2 = -1
•2-2 = 0
•3-2 = 1
•Sum of these differences is
•-1 + 0 + 1 = 0
•Zero-sum property states that no matter what
numbers you start with, a result (sum of differences
between them and their mean) would be 0
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 2.6

Interpreting the
Standard Deviation

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Interpreting Standard Deviation:
Empirical Rule
• Applies to data sets that are mound shaped and
symmetric
• Approximately 68% of the measurements lie
x  s to x  s
in the interval
• Approximately 95% of the measurements lie
in the intervalx  2s to x  2s
• Approximately 99.7% of the measurements lie
in the interval x  3s to x  3s

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Interpreting Standard Deviation:
Empirical Rule

x – 3s x – 2s x–s x x+s x +2s x + 3s

Approximately 68% of the measurements

Approximately 95% of the measurements

Approximately 99.7% of the measurements

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© 2011 Pearson Education, Inc
 Empirical Rule Example
Previously we found the mean
closing stock price of new
stock issues is 15.5 and the
standard deviation is 3.34. If
we can assume the data is
symmetric and mound shaped,
calculate the percentage of the
data that lie within the intervals
x + s, x + 2s, x + 3s.
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 Empirical Rule Example
• According to the Empirical Rule, approximately 68%
of the data will lie in the interval (x – s, x + s),
(15.5 – 3.34, 15.5 + 3.34) = (12.16, 18.84)
• Approximately 95% of the data will lie in the interval
(x – 2s, x + 2s),
(15.5 – 2∙3.34, 15.5 + 2∙3.34) = (8.82, 22.18)
• Approximately 99.7% of the data will lie in the interval
(x – 3s, x + 3s),
(15.5 – 3∙3.34, 15.5 + 3∙3.34) = (5.48, 25.52)
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 Coefficient of variation / CV

• The coefficient of variation (CV) is the ratio of the standard deviation

to the mean. The higher the coefficient of variation, the greater the
level of dispersion around the mean. It is generally expressed as a
percentage. Without units, it allows for comparison between
distributions of values whose scales of measurement are not
comparable. When we are presented with estimated values, the CV
relates the standard deviation of the estimate to the value of this
estimate. The lower the value of the coefficient of variation, the
more precise the estimate.
(accessible at: https://www.insee.fr/en/metadonnees/definition/c1366)

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 Covariance
• Variables may change in relation to each
other

• Covariance measures how much the

movement in one variable predicts the
movement in a corresponding variable

R F Riesenfeld Sp 2010 CS5961 Comp Stat 46

 Smoking and Lung Capacity
• Example: investigate relationship between
cigarette smoking and lung capacity

• Data: sample group response data on

smoking habits, and measured lung
capacities, respectively

R F Riesenfeld Sp 2010 CS5961 Comp Stat 47

 Smoking v Lung Capacity Data

N Cigarettes (X ) Lung Capacity (Y )

1 0 45
2 5 42
3 10 33
4 15 31
5 20 29

R F Riesenfeld Sp 2010 CS5961 Comp Stat 48

 Smoking v Lung Capacity
• Observe that as smoking exposure goes
up, corresponding lung capacity goes
down
• Variables covary inversely
• Covariance and Correlation quantify
relationship

R F Riesenfeld Sp 2010 CS5961 Comp Stat 49

 Covariance
• Variables that covary inversely, like
smoking and lung capacity, tend to appear
on opposite sides of the group means
– When smoking is above its group mean, lung
capacity tends to be below its group mean.
• Average product of deviation measures
extent to which variables covary, the
degree of linkage between them

R F Riesenfeld Sp 2010 CS5961 Comp Stat 50

 The Sample Covariance
• Similar to variance, for theoretical reasons,
average is typically computed using (N -1),
not N . Thus,

1 N
S xy  
N  1 i 1
 Xi  X Y  Y 
i

R F Riesenfeld Sp 2010 CS5961 Comp Stat 51

 Calculating Covariance

Cigs (X ) Lung Cap (Y )

0 45
5 42
10 33
15 31
20 29
X  10 Y  36

R F Riesenfeld Sp 2010 CS5961 Comp Stat 52

 Calculating Covariance

Cigs (X ) ( X  X ) ( X  X ) (Y  Y ) (Y  Y ) Cap (Y )

0 -10 -90 9 45
5 -5 -30 6 42
10 0 0 -3 33
15 5 -25 -5 31
20 10 -70 -7 29
∑= -215
R F Riesenfeld Sp 2010 CS5961 Comp Stat 53
54
 Covariance Calculation (2)

Evaluation yields,

1
S xy  ( 215)  53.75
4

R F Riesenfeld Sp 2010 CS5961 Comp Stat 55

 2.7

Numerical Measures
of Relative Standing

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 Numerical Measures of
Relative Standing: Percentiles
• Describes the relative location of a
measurement compared to the rest of the data
• The pth percentile is a number such that p% of
the data falls below it and (100 – p)% falls
above it
• Median = 50th percentile

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 Percentile Example
• You scored 560 on the GMAT exam. This
score puts you in the 58th percentile.
• What percentage of test takers scored lower
than you did?
• What percentage of test takers scored higher
than you did?

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 Percentile Example
• What percentage of test takers scored lower
than you did?
58% of test takers scored lower than 560.
• What percentage of test takers scored higher
than you did?
(100 – 58)% = 42% of test takers scored
higher than 560.

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 Deciles Example
Deciles divide a set of observations into 10 equal parts and
percentiles into 100 equal parts. So if you found that your GPA
was in the 8th decile at your university, you could conclude that
80% of the students had a GPA lower than yours and 20%
had a higher GPA.

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 2.8

Methods for Detecting Outliers:

Box Plots and z-Scores

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 Outlier
An observation (or measurement) that is unusually large
or small relative to the other values in a data set is
called an outlier. Outliers typically are attributable to
one of the following causes:
1. The measurement is observed, recorded, or entered
into the computer incorrectly.
2. The measurement comes from a different
population.
3. The measurement is correct but represents a rare
(chance) event.
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 Quartiles
Measure of noncentral tendency
Split ordered data into 4 quarters
25% 25% 25% 25%
Q1 Q2 Q3
Lower quartile QL is 25th percentile.
Middle quartile m is the median.
Upper quartile QU is 75th percentile.
Interquartile range: IQR = QU – QL
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 Interquartile Range
1. Measure of dispersion
2. Also called midspread
3. Difference between third & first quartiles
• Interquartile Range = Q3 – Q1
4. Spread in middle 50%
5. Not affected by extreme values

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 What is Kurtosis?

A normal distribution has excess kurtosis equal to zero, a leptokurtic

distribution has excess kurtosis greater than zero, and platykurtic distributions
will have excess kurtosis less than zero.

“Greater positive kurtosis and more negative skew in

returns distributions indicates increased risk.”