Chapter 3 Business Statistics

Objectives
Chapter 3
In this chapter, you learn to:
Numerical Descriptive Describe the properties of central tendency,
Measures variation, and shape in numerical variables.
Construct and interpret a boxplot.
Compute descriptive summary measures for a
population.
Calculate the covariance and the coefficient of
correlation.
ALWAYS LEARNING Copyright © 2020 Pearson Education Ltd. All Rights Reserved.. Slide 1 ALWAYS LEARNING Copyright © 2020 Pearson Education Ltd. All Rights Reserved.. Slide 2
Measures of Central Tendency:

Summary Definitions The Mean DCOVA
DCOVA
The central tendency is the extent to which the The arithmetic mean (often just called the “mean”)
values of a numerical variable group around a typical is the most common measure of central tendency.
or central value.
For a sample of size n:
The ith value
The variation is the amount of dispersion or Pronounced X-bar
scattering away from a central value that the values n
of a numerical variable show. ¦X i

i 1 X1 X2 Xn
X
n n
The shape is the pattern of the distribution of values
from the lowest value to the highest value. Sample size Observed values
Measures of Central Tendency: Measures of Central Tendency:
The Mean (con’t) DCOVA The Median DCOVA
The most common measure of central tendency.

In an ordered array, the median is the “middle”
Mean = sum of values divided by the number of values.
Affected by extreme values (outliers). number (50% above, 50% below).
11 12 13 14 15 16 17 18 19 20 11 12 13 14 15 16 17 18 19 20 11 12 13 14 15 16 17 18 19 20 11 12 13 14 15 16 17 18 19 20
Mean = 13 Mean = 14 Median = 13 Median = 13
11 12 13 14 15 65 11 12 13 14 20 70
13 14 Less sensitive than the mean to extreme values.
5 5 5 5

Locating the Median The Mode
DCOVA DCOVA
Value that occurs most often.
The location of the median when the values are in numerical order
(smallest to largest): Not affected by extreme values.
n 1 Used for either numerical or categorical data.
Median position positionin the ordered data
2 There may be no mode.
If the number of values is odd, the median is the middle number. There may be several modes.
If the number of values is even, the median is the average of the
two middle numbers.
Note that n 1 is not the value of the median, only the position of 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 0 1 2 3 4 5 6
2
the median in the ranked data. Mode = 9 No Mode
Review Example Which Measure to Choose?
DCOVA DCOVA
House Prices: Mean: ($3,000,000/5) The mean is generally used, unless extreme values
$2,000,000 = $600,000 (outliers) exist.
$ 500,000
Median: middle value of ranked The median is often used, since the median is not
$ 300,000
$ 100,000 data sensitive to extreme values. For example, median
$ 100,000 = $300,000 home prices may be reported for a region; it is less
Sum $ 3,000,000 Mode: most frequent value sensitive to outliers.
= $100,000 In many situations it makes sense to report both the
mean and the median.
Measures of Central Tendency:

Summary Measures of Variation
DCOVA Variation DCOVA
Central Tendency
Range Variance Standard Coefficient
Deviation of Variation
Arithmetic Median Mode

Mean
n Measures of variation give
¦X i
i 1
information on the spread
X
n Middle value Most or variability or
in the ordered frequently dispersion of the data
array observed values. Same center,
value
different variation
Measures of Variation: Measures of Variation:
The Range Why The Range Can Be Misleading
DCOVA DCOVA
Simplest measure of variation. Does not account for how the data are distributed.
Difference between the largest and the smallest values:
7 8 9 10 11 12 7 8 9 10 11 12
Range = 12 - 7 = 5 Range = 12 - 7 = 5
Range = Xlargest – Xsmallest
Sensitive to outliers
Example: 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
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
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 = 13 - 1 = 12 Range = 120 - 1 = 119

The Sample Variance The Sample Standard Deviation
DCOVA DCOVA
Most commonly used measure of variation.
Average (approximately) of squared deviations
of values from the mean. Shows variation about the mean.
Is the square root of the variance.
n
Sample variance: 2 Has the same units as the original data.
(X
¦ i X )
i 1
S2 n
n -1 2
Sample standard deviation: ¦ (X X) i
Where i 1
X = arithmetic mean S
n = sample size n -1
Xi = ith value of the variable X
Sample Standard Deviation Calculation
The Sample Standard Deviation Example
DCOVA DCOVA
Steps for Computing Standard Deviation: Sample
Data (Xi) : 10 12 14 15 17 18 18 24
1. Compute the difference between each value n=8 Mean = X = 16
and the mean. (10 X)2 (12 X)2 (14 X)2 (24 X)2
S
2. Square each difference. n 1
3. Add the squared differences.
(10 16)2 (12 16)2 (14 16)2 (24 16)2
4. Divide this total by n-1 to get the sample
8 1
variance.
5. Take the square root of the sample variance 130 A measure of the “average”
4.3095
to get the sample standard deviation. 7 scatter around the mean.

Comparing Standard Deviations Comparing Standard Deviations
DCOVA DCOVA
Data A
Mean = 15.5 Smaller standard deviation
11 12 13 14 15 16 17 18 19 20 21 S = 3.338
Larger standard deviation
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 = 4.567
11 12 13 14 15 16 17 18 19 20 21
Summary Characteristics The Coefficient of Variation
DCOVA DCOVA
The more the data are spread out, the greater the
Measures relative variation.
range, variance, and standard deviation.
Always in percentage (%).
The more the data are concentrated, the smaller the Shows variation relative to mean.
range, variance, and standard deviation. Can be used to compare the variability of two or
more sets of data measured in different units.
If the values are all the same (no variation), all these
measures will be zero.
§ S·
CV ¨ ¸
None of these measures are ever negative. ¨ X ¸ 100%
© ¹

Comparing Coefficients of Variation Comparing Coefficients of Variation (con’t)
DCOVA
Stock A: Stock A:
DCOVA
Mean price last year = $50. Mean price last year = $50.
Standard deviation = $5. Standard deviation = $5.
§S· $5 §S· $5
CVA ¨¨ ¸¸ 100% 100% 10% CVA ¨¨ ¸¸ 100% 100% 10%
©X¹ $50 Both stocks have X $50 Stock C has a
the same
© ¹ much smaller
Stock B: Stock C:
standard standard
Mean price last year = $100. deviation, but Mean price last year = $8. deviation but a
stock B is less much higher
Standard deviation = $5. Standard deviation = $2.
variable relative coefficient of
to its mean price. variation
§S· $5 § S · $2
CVB ¨¨ ¸¸ 100% 100% 5% CVC ¨¨ ¸ 100%
¸ 100% 25%
©X¹ $100 ©X ¹ $8
Locating Extreme Outliers: Locating Extreme Outliers:
Z-Score Z-Score
DCOVA DCOVA
To compute the Z-score of a data value, subtract the XX
mean and divide by the standard deviation. Z
S
The Z-score is the number of standard deviations a
data value is from the mean. where X represents the data value
X is the sample mean
A data value is considered an extreme outlier if its Z-
score is less than -3.0 or greater than +3.0. S is the sample standard deviation
The larger the absolute value of the Z-score, the

farther the data value is from the mean.
Locating Extreme Outliers:

Z-Score Shape of a Distribution
DCOVA
DCOVA
Suppose the mean math SAT score is 490, with a Describes how data are distributed.
standard deviation of 100.
Two useful shape related statistics are:
Compute the Z-score for a test score of 620.
Skewness:
Measures the extent to which data values are not
X X 620 490 130
Z 1.3 symmetrical.
S 100 100
Kurtosis:
Kurtosis measures the peakedness of the curve of
A score of 620 is 1.3 standard deviations above the
mean and would not be considered an outlier. the distribution—that is, how sharply the curve
rises approaching the center of the distribution.
Shape of a Distribution Shape of a Distribution -- Kurtosis
measures how sharply the curve rises
(Skewness) approaching the center of the distribution
DCOVA
DCOVA
Measures the extent to which data is not
Sharper Peak
symmetrical. Than Bell-Shaped
Right-Skewed (Kurtosis > 0)
Left-Skewed Symmetric
Mean < Median Mean = Median Median < Mean
Bell-Shaped
(Kurtosis = 0)
Flatter Than
Bell-Shaped
(Kurtosis < 0)
Skewness
Statistic < 0 0 >0
Exploring Numerical Data Using

Quartiles DCOVA
Quartile Measures
DCOVA
Quartiles split the ranked data into 4 segments with
Can visualize the distribution of the values an equal number of values per segment.
for a numerical variable by computing:
25% 25% 25% 25%
The quartiles.
Q1 Q2 Q3
The five-number summary. The first quartile, Q1, is the value for which 25% of the
values are smaller and 75% are larger.
Q2 is the same as the median (50% of the values are
Constructing a boxplot. smaller and 50% are larger).
Only 25% of the values are greater than the third quartile.
Quartile Measures: Quartile Measures:
Locating Quartiles Calculation Rules
DCOVA DCOVA
When calculating the ranked position use the
Find a quartile by determining the value in the
appropriate position in the ranked data, where: following rules:
If the result is a whole number then it is the ranked
position to use.
First quartile position: Q1 = (n+1)/4 ranked value.
If the result is a fractional half (e.g. 2.5, 7.5, 8.5, etc.)

Second quartile position: Q2 = (n+1)/2 ranked value.
then average the two corresponding data values.
Third quartile position: Q3 = 3(n+1)/4 ranked value.
If the result is not a whole number or a fractional half
then round the result to the nearest integer to find the
where n is the number of observed values.
ranked position.
Quartile Measures Quartile Measures:

Calculating The Quartiles: Example The Interquartile Range (IQR)
DCOVA
DCOVA
Sample Data in Ordered Array: 11 12 13 16 16 17 18 21 22
The IQR is Q3 – Q1 and measures the spread in the
(n = 9) middle 50% of the data.
Q1 is in the (9+1)/4 = 2.5 position of the ranked data,
The IQR is also called the midspread because it covers
so Q1 = (12+13)/2 = 12.5.
the middle 50% of the data.
Q2 is in the (9+1)/2 = 5th position of the ranked data,
The IQR is a measure of variability that is not
so Q2 = median = 16.
influenced by outliers or extreme values.
Q3 is in the 3(9+1)/4 = 7.5 position of the ranked data,
Measures like Q1, Q3, and IQR that are not influenced
so Q3 = (18+21)/2 = 19.5.
by outliers are called resistant measures.
Q1 and Q3 are measures of non-central location.
Q2 = median, is a measure of central tendency.
Calculating The Interquartile
Range The Five Number Summary
DCOVA DCOVA
The five numbers that help describe the center, spread
Example:
and shape of data are:
X Median X
minimum Q1 (Q2) Q3 maximum Xsmallest.
25% 25% 25% 25% First Quartile (Q1).
12 30 45 57 70 Median (Q2).
Third Quartile (Q3).
Xlargest.
Interquartile range
= 57 – 30 = 27
Relationships among the five-number

Five Number Summary and
summary and distribution shape The Boxplot
DCOVA DCOVA
Left-Skewed Symmetric Right-Skewed The Boxplot: A Graphical display of the data

Median – Xsmallest Median – Xsmallest Median – Xsmallest based on the five-number summary:
> ≈ <
Xsmallest -- Q1 -- Median -- Q3 -- Xlargest
Xlargest – Median Xlargest – Median Xlargest – Median
Example:
Q1 – Xsmallest Q1 – Xsmallest Q1 – Xsmallest
> ≈ < 25% of data 25% 25% 25% of data

Xlargest – Q3 Xlargest – Q3 Xlargest – Q3 of data of data
Median – Q1 Median – Q1 Median – Q1

Xsmallest Q1 Median Q3 Xlargest
> ≈ <
Q3 – Median Q3 – Median Q3 – Median
Five Number Summary: Distribution Shape and
Shape of Boxplots The Boxplot
DCOVA DCOVA
If data are symmetric around the median then the box
and central line are centered between the endpoints. Left-Skewed Symmetric Right-Skewed
Xsmallest Q1 Median Q3 Xlargest Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
A Boxplot can be shown in either a vertical or horizontal

orientation.
Numerical Descriptive
Boxplot Example Measures for a Population
DCOVA
DCOVA
Below is a Boxplot for the following data: Descriptive statistics discussed previously described a
sample, not the population.
Xsmallest Q1 Q2 / Median Q3 Xlargest
Summary measures describing a population, called
0 2 2 2 3 3 4 5 5 9 27
parameters, are denoted with Greek letters.
Important population parameters are the population mean,

variance, and standard deviation.
00 2233 5 5 27 27
The data are right skewed, as the plot depicts.

Numerical Descriptive Measures Numerical Descriptive Measures
for a Population: The mean μ For A Population: The Variance σ2
DCOVA DCOVA
The population mean is the sum of the values in Average of squared deviations of values from
the population divided by the population size, N. the mean.
N
2
N Population variance: ¦ (X μ) i
¦X i i 1
X1 X2 XN σ2
i 1 N
P
N N
Where μ = population mean Where μ = population mean
N = population size N = population size
Xi = ith value of the variable X Xi = ith value of the variable X
Numerical Descriptive Measures For A Sample statistics versus

Population: The Standard Deviation σ population parameters
DCOVA DCOVA
Most commonly used measure of variation.
Shows variation about the mean. Measure Population Sample
Parameter Statistic
Is the square root of the population variance.
Has the same units as the original data. Mean
P X
Variance
N V2 S2
Population standard deviation: 2
¦ (X μ) i
i 1 Standard
σ V S
Deviation
N
The Empirical Rule DCOVA
The Empirical Rule
DCOVA
Approximately 95% of the data in a symmetric mound-
The empirical rule approximates the variation of shaped distribution lies within two standard deviations
data in a symmetric mound-shaped distribution. of the mean, or μ ± 2σ.
Approximately 68% of the data in a symmetric
Approximately 99.7% of the data in a symmetric mound-
mound shaped distribution is within 1 standard shaped distribution lies within three standard deviations
deviation of the mean or μ ± 1σ. of the mean, or μ ± 3σ.
68%
95% 99.7%
μ
μ ± 1σ μ r 2σ μ r 3σ
Using the Empirical Rule Chebyshev’s Rule

DCOVA DCOVA
Suppose that the variable Math SAT scores is bell- Regardless of how the data are distributed, at
shaped with a mean of 500 and a standard deviation least (1 - 1/k2) x 100% of the values will fall
of 90. Then: within k standard deviations of the mean (for k
> 1).
Approximately 68% of all test takers scored between 410
and 590, (500 ± 90). Examples:
Approximately 95% of all test takers scored between 320 Within
At least
and 680, (500 ± 180).
Approximately 99.7% of all test takers scored between (1 - 1/22) x 100% = 75% ….............. k=2 (μ ± 2σ)
230 and 770, (500 ± 270). (1 - 1/32) x 100% = 88.89% ……….. k=3 (μ ± 3σ)
We Discuss Two Measures Of The Relationship
Between Two Numerical Variables The Covariance
DCOVA
The covariance measures the strength of the linear
Scatter plots allow you to visually examine the
relationship between two numerical variables (X & Y).
relationship between two numerical variables
and now we will discuss two quantitative
The sample covariance:
measures of such relationships.
n
i
¦ ( X X)( Y Y) i
The Covariance. i 1
cov ( X , Y )
The Coefficient of Correlation. n 1
Only concerned with the strength of the relationship.
No causal effect is implied.
Interpreting Covariance Coefficient of Correlation

DCOVA DCOVA
Covariance between two variables: Measures the relative strength of the linear
relationship between two numerical variables.
cov(X,Y) > 0 X and Y tend to move in the same direction.
Sample coefficient of correlation:
cov(X,Y) < 0 X and Y tend to move in opposite directions.
cov (X , Y)
cov(X,Y) = 0 X and Y are independent. r
SX SY
The covariance has a major flaw: Where,
n n n
It is not possible to determine the relative strength of the 2 2
i
¦ (X X)(Y Y) i ¦ (X X)i i
¦ (Y Y )
relationship from the size of the covariance. i 1 i 1 i 1
cov (X , Y) SX SY
n 1 n 1 n 1
Features of the Scatter Plots of Sample Data with
Coefficient of Correlation Various Coefficients of Correlation
DCOVA Y Y DCOVA
The population coefficient of correlation is referred as U.
The sample coefficient of correlation is referred to as r.
Either ρ or r have the following features:
X X
Unit free. r = -1 r = -.6
Range between –1 and 1.
Y
The closer to –1, the stronger the negative linear relationship. Y Y
The closer to 1, the stronger the positive linear relationship.
The closer to 0, the weaker the linear relationship.
X X X
r = +1 r = +.3 r=0
Pitfalls in Numerical
Descriptive Measures Ethical Considerations
DCOVA DCOVA
Data analysis is objective: Numerical descriptive measures:
Should report the summary measures that best
Should document both good and bad results.
describe and communicate the important aspects of
the data set. Should be presented in a fair, objective and
neutral manner.
Data interpretation is subjective: Should not use inappropriate summary
Should be done in fair, neutral and clear manner. measures to distort facts.
Chapter Summary
In this chapter we have discussed:

Describing the properties of central tendency,
variation, and shape in numerical variables.
Constructing and interpreting a boxplot.
Computing descriptive summary measures for a
population.
Calculating the covariance and the coefficient of
correlation.
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Objectives

Measures of Central Tendency:

scattering away from a central value that the values n

of a numerical variable show. ¦X i

 The most common measure of central tendency.

Mean = 13 Mean = 14 Median = 13 Median = 13

Measures of Central Tendency: Measures of Central Tendency:

Measures of Central Tendency:

Arithmetic Median Mode

Measures of Variation: Measures of Variation:

Measures of Variation: Measures of Variation:

Data C Mean = 15.5

Measures of Variation: Measures of Variation:

 Standard deviation = $5.  Standard deviation = $5.

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

Locating Extreme Outliers:

Exploring Numerical Data Using

 If the result is a fractional half (e.g. 2.5, 7.5, 8.5, etc.)

Quartile Measures Quartile Measures:

Relationships among the five-number

Left-Skewed Symmetric Right-Skewed  The Boxplot: A Graphical display of the data

> ≈ < 25% of data 25% 25% 25% of data

Median – Q1 Median – Q1 Median – Q1

Q3 – Median Q3 – Median Q3 – Median

Xsmallest Q1 Median Q3 Xlargest Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3

 A Boxplot can be shown in either a vertical or horizontal

 Important population parameters are the population mean,

 The data are right skewed, as the plot depicts.

Numerical Descriptive Measures For A Sample statistics versus

Using the Empirical Rule Chebyshev’s Rule

Interpreting Covariance Coefficient of Correlation

In this chapter we have discussed:

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The most common measure of central tendency.

Standard deviation = $5. Standard deviation = $5.

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

If the result is a fractional half (e.g. 2.5, 7.5, 8.5, etc.)

Left-Skewed Symmetric Right-Skewed The Boxplot: A Graphical display of the data

A Boxplot can be shown in either a vertical or horizontal

Important population parameters are the population mean,

The data are right skewed, as the plot depicts.