Business Statistics, 3e
by Ken Black
Chapter 3
Discrete Distributions
Descriptive
Statistics
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-1
Learning Objectives
• Distinguish between measures of central
tendency, measures of variability, and
measures of shape
• Understand the meanings of mean, median,
mode, quartile, percentile, and range
• Compute mean, median, mode, percentile,
quartile, range, variance, standard
deviation, and mean absolute deviation on
ungrouped data
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-2
Measures of Central Tendency:
Ungrouped Data
• Measures of central tendency yield
information about “particular places or
locations in a group of numbers.”
• Common Measures of Location
– Mode
– Median
– Mean
– Percentiles
– Quartiles
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-3
What is the Mode, Median, Mean?
• MODE: The most frequently occurring value in a data set.
Bimodal data sets have two modes, multi-modal data sets contain
more than two modes
• MEDIAN: Middle value in an ordered array of numbers.
Unaffected by extremely large and extremely small values.
• ARITHEMETRIC MEAN: Know as ‘the mean’.
It is the average of a group of numbers.
• PERCENTILES: Measures of central tendency that divide a
group of data into 100 parts. At least n% of the data lie below the
nth percentile, and at most (100 - n)% of the data lie above then
nth percentile 3-4
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning
Mode -- Example
• The mode is 44.
• There are more 44s 35 41 44 45
than any other value. 37 41 44 46
37 43 44 46
39 43 44 46
40 43 44 46
40 43 45 48
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-5
Median: Computational Procedure
• First Procedure
– Arrange the observations in an ordered array.
– If there is an odd number of terms, the median
is the middle term of the ordered array.
– If there is an even number of terms, the median
is the average of the middle two terms.
• Second Procedure
– The median’s position in an ordered array is
given by (n+1)/2.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-6
Median: Example
with an Odd Number of Terms
Ordered Array
3 4 5 7 8 9 11 14 15 16 16 17 19 19 20 21 22
• There are 17 terms in the ordered array.
• Position of median = (n+1)/2 = (17+1)/2 = 9
• The median is the 9th term, 15.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-7
Median: Example
with an Even Number of Terms
Ordered Array
3 4 5 7 8 9 11 14 15 16 16 17 19 19 20 21
• There are 16 terms in the ordered array.
• Position of median = (n+1)/2 = (16+1)/2 = 8.5
• The median is between the 8th and 9th terms,
14.5.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-8
Population Mean vs. Sample Mean
Population Computation Sample Computation
X X X X
1 2 3
... X N
X
X X X X
1 2 3
... X n
N N n n
24 13 19 26 11 57 86 42 38 90 66
5 6
93 379
5 6
18. 6 63.167
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-9
Percentiles:
Percentiles: Computational
Computational Procedure
Procedure
• Organize the data into an ascending ordered
array.
• Calculate the
percentile location: P
i (n)
100
• Determine the percentile’s location and its
value.
• If i is a whole number, the percentile is the
average of that number and the next highest
number.
• If i is not a whole number, round up to
determine the value.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-10
Percentiles: Example
• Raw Data: 14, 12, 19, 23, 5, 13, 28, 17
• Ordered Array: 5, 12, 13, 14, 17, 19, 23, 28
• Location of
30th percentile:
30
i (8 ) 2. 4
100
• The location index, i, is not a whole
number; so round up and determine the 30th
percentile is at the 3rd location of the array;
the 30th percentile is 13.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-11
Quartiles: Another form of Percentiles
• Measures of central tendency that divide a group of
data into four subgroups
• Q1: 25% of the data set is below the first quartile, Q2:
50% of the data set is below the second quartile, Q3:
75% of the data set is below the third quartile
• Q1 is equal to the 25th percentile, Q2 is located at 50th
percentile, Q3 is equal to the 75th percentile
• Quartile values are not necessarily members of the
data set
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-12
Quartiles
Q1 Q2 Q3
25% 25% 25% 25%
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-13
Quartiles: Example
• Ordered array: 106, 109, 114, 116, 121, 122,
125, 129
• Q1 25 109 114
i (8 ) 2 Q1 111 . 5
100 2
50 116 121
• Q2: i (8 ) 4 Q2 118 . 5
100 2
75 122 125
• Q3: i (8 ) 6 Q3 123 . 5
100 2
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-14
What is Variability?
No Variability in Cash Flow Mean
Mean
Variability in Cash Flow Mean
Mean
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-15
Variability
Variability
No Variability
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-16
Measures
Measures of
of Variability:
Variability:
Ungrouped
Ungrouped Data
Data
• Measures of variability describe the spread
or the dispersion of a set of data.
• Common Measures of Variability
– Range
– Interquartile Range
– Mean Absolute Deviation
– Variance
– Standard Deviation
– Z scores
– Coefficient of Variation
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-17
Range
• The difference between the largest and the
smallest values in a set of data
• Simple to compute 35 41 44 45
• Ignores all data points except 37 41 the 44 46
two extremes
• Example: 37 43 44 46
Range = Largest - Smallest 39 43 44 46
= 48 - 35 = 13
40 43 44 46
40 43 45 48
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-18
Deviation from the Mean
• Data set: 5, 9, 16, 17, 18
• Mean: X 65
13
N 5
• Deviations from the mean: -8, -4, 3, 4, 5+4 +5
+3
-8 -4
0 5 10 15 20
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-19
Mean Absolute Deviation
• Average of the absolute deviations from the
mean
X X X X
M . A. D.
5 -8 +8 N
9 -4 +4 24
16 +3 +3
17 +4 +4
5
18 +5 +5 4. 8
0 24
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-20
Population Variance
• Average of the squared deviations from the
arithmetic mean
X X X
X
2
2
2
5 -8 64
9 -4 16 N
16 +3 9 130
17 +4 16 5
18 +5 25 26.0
0 130
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-21
Population Standard Deviation
• Square root of the
variance
X
2
X X
2
X
2
N
5 -8 64 130
9 -4 16
5
16 +3 9
26.0
17 +4 16
18 +5 25
2
0 130
26.0
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning
51
. 3-22
Sample Variance
• Average of the squared deviations from the
arithmetic mean
X X X X
X X
2
X 2
2
2,398 625 390,625 S
n 1
1,844 71 5,041
1,539 -234 54,756 663,866
1,311 -462 213,444 3
7,092 0 663,866 221,288.67
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-23
Sample Standard Deviation
• Square root of the
X X
2
sample variance 2
S
n 1
X X X X
2
X
663,866
2,398 625 390,625
1,844 71 5,041 3
1,539 -234 54,756 221,288.67
1,311 -462 213,444 2
7,092 0 663,866 S S
221,288.67
470.41
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-24
Uses of Standard Deviation
• Indicator of financial risk
• Quality Control
– construction of quality control charts
– process capability studies
• Comparing populations
– household incomes in two cities
– employee absenteeism at two plants
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-25
Standard Deviation as an
Indicator of Financial Risk
Annualized Rate of Return
Financial
Security
A 15% 3%
B 15% 7%
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-26
Coefficient of Variation
• Ratio of the standard deviation to the mean,
expressed as a percentage
• Measurement of relative dispersion
C .V . 100
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-27
Coefficient of Variation
291
84
2
1
4.6 2
10
. . 100
CV 1
1
CV
. . 2
2
100
1 2
4.6 10
100 100
29 84
1586
. 1190
.
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-28
Empirical Rule
• Data are normally distributed (or
approximately normal)
Distance from Percentage of Values
the Mean Falling Within Distance
1 68
2 95
3 99.7
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-29
Beware of Skewness
Absence of symmetry. Extreme values in one side of a distribution
Negatively Symmetric Positively
Skewed (Not Skewed) Skewed
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-30
Skewness
Mean Mode Mean Mean
Mode
Median
Median Mode Median
Negatively Symmetric Positively
Skewed (Not Skewed) Skewed
Business Statistics: Contemporary Decision Making, 3e, by Black. © 2001 South-Western/Thomson Learning 3-31