Hapter: Numerical Descriptive Measures

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Learning objectives
3.1 Calculate and interpret the mean, median
and mode.
CHAPTER 3 3.2 Calculate and interpret percentiles and box
plots.
Numerical descriptive 3.3 Calculate and interpret the range, mean

absolute deviation, variance, standard
measures deviation and coefficient of variation.
3.4 Explain mean–variance analysis and the
Sharpe ratio.
continued
Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd
Jaggia, Essentials of Business Statistics, 1e 3-1 Jaggia, Essentials of Business Statistics, 1e 3-2
Updated by: Azizur Rahman Updated by: Azizur Rahman
1 2
Learning objectives Investment decision

3.5 Apply Chebyshev’s theorem, the empirical • A young couple with a superannuation investment
rule and z-scores. has decided to have a closer look at how the
Australian Super fund invests their money. They
3.6 Calculate the mean and variance for ask you to explain the return performance of two
grouped data. investment options
3.7 Calculate and interpret the covariance and – Fixed-interest
correlation coefficient. – High-growth.
• The couple has collected sample returns for these

two investment options for the years 2005 to 2014.
This data is presented in the next slide.
continued
3 4
Investment decision Measures of central location

LO 3.1 Calculate and interpret the mean, median and
mode.
• The arithmetic mean is a primary measure of

central location.
Sample mean Population mean
xx =
x i
 =
x i
The couple would like to: n N

1. Determine the typical return of the two options
2. Evaluate the investment risk of the two options.
continued
5 6
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LO 3.1 Measures of central location LO 3.1 Measures of central location

Example: Investment decision • The median is a measure of central location that
• Use the data in the introductory case to calculate is not affected by outliers.
and interpret the mean returns of the fixed-interest
and high-growth funds. • When the data is arranged in ascending order,
the median is:
7.55 + 3.48 +  + 5.63 55.93
Fixed interest mean return = = = 5.59%
10 10 – the middle value if the number of observations is odd
14.45 + 19.84 +  + 16.23 81.60 – the average of the two middle values if the number of
High growth mean return = = = 8.16%
10 10 observations is even.
• The mean is sensitive to extreme observations

(extremely large or small), known as outliers.
continued continued
7 8

• Consider the sorted salaries of employees at • Consider the sorted data from the high-growth fund
Photodyne (odd number). of the introductory case (even number).
Median = $90,000 Median = (11.28 + 14.45) / 2 = 12.87%
continued continued
9 10

• The mode is another measure of central location. Weighted mean
– The most frequently occurring value in a data set • Let w1, w2,…, wn denote the weights of the
– Used to summarise qualitative data sample observations x1, x2,…, xn such that
w1 + w2 +…+ wn = 1, then
– A data set can have no mode, one mode (unimodal), or
many modes (multimodal).
𝑋ത = ෍ 𝑊𝑖 𝑋𝑖
• Consider the salary of employees at Photodyne.
– The mode is $40,000, since this value appears most
often.
continued continued
11 12
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LO 3.1 Measures of central location Percentiles and box plots

LO 3.2 Calculate and interpret percentiles and box plots.
• A student scores 60% on exam 1, 70% on exam 2,
and 80% on exam 3. What is the student’s • In general, the pth percentile divides a data set
weighted average grade if exams 1 and 2 are each into two parts, i.e. about p% and (100 ─ p)% of
worth 25% of the grade and exam 3 is worth 50%? the observations, respectively, have values less
– Define w 1 = 0.25, w 2 = 0.25 and w 3 = 0.50. than and greater than the pth percentile.
• Calculating the pth percentile
x = w r xr = 0.25(60) + 0.25(70) + 0.50(80) = 72.50 – First arrange the data in ascending order
– Locate the position, Lp, of the pth percentile by using
– The unweighted mean is only 70, as it does not the formula
incorporate a higher weight for the score on exam 3.
Lp = (n + 1)
p
100
continued
13 14
LO 3.2 Percentiles and box plots LO 3.2 Percentiles and box plots
• Consider the sorted data from the introductory

• Once you find Lp, check whether or not it is an
case.
integer.
– If Lp is an integer, then Lp denotes the location of the pth

percentile in the sorted data set.
– If Lp is not an integer, then interpolate between two

corresponding observations to approximate the pth – For the 25th percentile, we locate the position
percentile.
p 25
L25 = (n + 1) = (10 + 1) = 2.75. Similarly L75 = 8.25
100 100
continued continued
15 16
LO 3.2 Percentiles and box plots LO 3.2 Percentiles and box plots
• Neither L25 = 2.75 nor L75 = 8.25 are integers, thus • A box plot displays five summary values:
– Min = smallest value
– The 25th percentile is located 75% of the distance – Max = largest value
between the second and third observations
– Q1 = first quartile = 25th percentile
2.92 + 0.75(3.48 − 2.92) = 3.34 – Q2 = median = second quartile = 50th percentile
– The 75th percentile is located 25% of the distance – Q3 = third quartile = 75th percentile.
between the eighth and ninth observations
• A box plot allows you to:
7.55 + 0.25(7.99 − 7.55) = 7.65.
– Display the distribution of a data set and compare two or
more distributions
– Identify outliers in a data set.
continued continued
17 18
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LO 3.2 Percentiles and box plots Measures of dispersion

LO 3.3 Calculate and interpret the range, mean
• Using the results from the fixed-interest absolute deviation, variance, standard deviation
superannuation data, we can label the box and coefficient of variation.
plot with the five summary values.
• Measures of dispersion gauge variability of
a data set.
• Measures of dispersion include:

– Range
– Note that IQR = Q3 − Q1 = 4.31% and
1.5 × IQR = 6.47%. – Mean absolute deviation
– There are outliers if (Q1 – smallest value) > 6.47%, – Variance and standard deviation
or if (largest value – Q3) > 6.47%. – Coefficient of variation.
– There are no outliers in this data set.
continued
19 20
LO 3.3 Measures of dispersion LO 3.3 Measures of dispersion
• The range is the simplest measure that focuses • The mean absolute deviation (MAD) is an
on extreme values. average of the absolute difference of each
observation from the mean.
Range = (Maximum value − Minimum value)
 xi − x
Sample MAD =
n
– For example, the range for the fixed-interest data is
10.66% − 1.56% = 9.10%.
 xi − 
Population MAD =
N
continued continued
21 22
• MAD calculations for the fixed-interest Variance and standard deviation

investment option • For a given sample
( x − x)
2
s2 = i
and s = s2
n −1
• For a given population
( x − )
2
 xi − x 20.79
2 = i
and  = 2
MAD = = = 2.079. N
n 10
continued continued
23 24
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Coefficient of variation (CV)
• Calculate the variance and standard deviation using
the data from the fixed-interest investment option. • CV adjusts for differences in the magnitudes of the
means. It is unitless, allowing easy comparison of
mean-adjusted dispersion across different data sets.
s σ
Sample CV = and Population CV =
x μ
– CV using data for the superannuation investment options
( xi − x )2 65.47
s2 = = = 7.274(%)2
n −1 10 − 1 Fixed-interest: CV =
s 2.697%
= = 0.4822
x 5.593%
s = 7.274 = 2.69%
s 12.7395%
High-growth: CV = = = 1.5612
x 8.16%
continued
25 26
Mean–variance analysis and LO 3.4 Mean–variance analysis and

the Sharpe ratio the Sharpe ratio
LO 3.4 Explain mean–variance analysis and the Sharpe
ratio. Sharpe ratio
Mean–variance analysis • Uses the mean and variance to evaluate risk.
• The performance of an asset is measured by its rate • Measures the extra reward per unit of risk.
of return. • For an investment I, the ratio is computed as
• The rate of return may be evaluated in terms of its
xI − Rf
reward (mean) and risk (variance). Sharpe ratio = , where xI , Rf and sI are,
sI
• Higher average returns are often associated with
respectively, the mean returns of I and a risk-free
higher risk.
asset, and the standard deviation of I.
continued continued
27 28
LO 3.4 Mean–variance analysis and

Analysis of relative location
the Sharpe ratio
LO 3.5 Apply Chebyshev’s theorem, the empirical rule and
• Sharpe ratios for the investment options in the z-scores.
introductory case, given that the return on a 1-year Chebyshev’s theorem
Commonwealth Government security is 2% • For any data set, the proportion of observations that
lie within k standard deviations from the mean is at
xI − Rf 5.59 − 2 least 1 − 1/k2, where k is any number greater than 1.
– Fixed-interest option: = = 1.33
sI 2.697
– Consider a large class with 280 students. The mean score
xI − Rf 8.16 − 2 on an exam is 74, with a standard deviation of 8. At least
– High-growth option: = = 0.48
sI 12.74 how many students scored between 58 and 90?
With k = 2, we have 1 − (1/2)2 = 0.75. At least 75% of 280,

or 210 students, scored between 58 and 90.
continued
29 30
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LO 3.5 Analysis of relative location LO 3.5 Analysis of relative location

Empirical rule z-scores
• Approximately 68% of all observations fall in the • Often useful to use z-score to find relative location.
interval
x s • A sample value’s z-score indicates the value’s
distance from the mean.
• Approximately 95% of all
x−x
observations fall in the • z-score for x is calculated as z =
interval s
x  2s
– A z-score of 2 indicates the sample value is 2 standard
• Almost all observations deviations above the mean. A z-score of –1.5 indicates a
fall in the interval sample value 1.5 standard deviations below the mean.
x  3s
continued
31 32
Summarising grouped data LO 3.6 Summarising grouped data

• Using the frequency distribution of house price data,
LO 3.6 Calculate the mean and variance for grouped data.
find the average, variance and standard deviation.
• When data is grouped or aggregated, we use these

formulas
Mean: x =
m  i i
n
 (m − x) i
2
Variance: s 2 = i – For the mean, sum the 4th column and divide by the sample
n −1 size: mean = 14,000/36 = 389 or $389,000.
Standard Deviation: s = s 2 – For the variance, first calculate the sum of the weighted
squared differences from the mean (5th column), then divide
by (n − 1) = 35, which yields a variance of 12,159($) 2.
where mi and i are the midpoint and frequency of
the ith class, respectively. – The square root of the variance yields a standard deviation
of $110.27.
continued
33 34
Covariance and correlation LO 3.7 Covariance and correlation

LO 3.7 Calculate and interpret the covariance and • The sample covariance sxy is computed as
correlation coefficient.
• The covariance (sxy or xy) describes the direction

s xy =
(x i − x )( y i − y )
of the linear relationship between two variables n −1
x and y.
• The correlation coefficient (rxy or rxy) describes • The population covariance xy is computed as
both the direction and strength of the relationship
between x and y. ( x − x ) ( y i − y )
 xy =
i
continued continued
35 36
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LO 3.7 Covariance and correlation LO 3.7 Covariance and correlation

• The sample correlation coefficient rxy is computed • Let’s calculate the covariance and the correlation
as coefficient for the corporate (x) and industry (y) fund
s xy
rxy = • Positive relationship
sx sy
• The population correlation coefficient rxy is

computed as
 xy
r xy =
 x y
• Note: −1 < rxy < 1 and −1 < rxy < 1. • Also recall: x = 5.61, sx = 8.25, y = 5.64, and sy = 8.525
continued continued
37 38
LO 3.1, LO 3.3, LO 3.7

LO 3.7 Covariance and correlation
Some Excel formulas
• We use the following table for the calculations. • On a spreadsheet with relevant data, select an
empty cell, then choose Formulas > Insert
Function. In the dialog box, choose Statistical
under Select a Category, then:
– For measures of central tendency, select AVERAGE,
MEDIAN, MODE.MULT or MODE.SNGL
– For measures of dispersion, select STDEV.P, STDEV.S,
VAR.P or VAR.S
( xi − x )( y i − y ) 965.402
• Covariance: sxy = = = 68.957 – For measures of covariance, select CORREL,
n −1 15 − 1
COVARIANCE.P or COVARIANCE.S.
sxy 68.957
• Correlation: rxy = = = 0.98 • Select array containing relevant data, then click OK.
s x sy (8.248)(8.525)
39 40

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1/14/2019

Numerical descriptive 3.3 Calculate and interpret the range, mean

Learning objectives Investment decision

• The couple has collected sample returns for these

Investment decision Measures of central location

• The arithmetic mean is a primary measure of

The couple would like to: n N

LO 3.1 Measures of central location LO 3.1 Measures of central location

• The mean is sensitive to extreme observations

LO 3.1 Measures of central location LO 3.1 Measures of central location

Median = $90,000 Median = (11.28 + 14.45) / 2 = 12.87%

LO 3.1 Measures of central location LO 3.1 Measures of central location

LO 3.1 Measures of central location Percentiles and box plots

• Consider the sorted data from the introductory

– If Lp is an integer, then Lp denotes the location of the pth

– If Lp is not an integer, then interpolate between two

LO 3.2 Percentiles and box plots Measures of dispersion

• Measures of dispersion include:

LO 3.3 Measures of dispersion LO 3.3 Measures of dispersion

LO 3.3 Measures of dispersion LO 3.3 Measures of dispersion

• MAD calculations for the fixed-interest Variance and standard deviation

• For a given population

LO 3.3 Measures of dispersion LO 3.3 Measures of dispersion

Mean–variance analysis and LO 3.4 Mean–variance analysis and

Mean–variance analysis • Uses the mean and variance to evaluate risk.

LO 3.4 Mean–variance analysis and

With k = 2, we have 1 − (1/2)2 = 0.75. At least 75% of 280,

LO 3.5 Analysis of relative location LO 3.5 Analysis of relative location

Summarising grouped data LO 3.6 Summarising grouped data

• When data is grouped or aggregated, we use these

Covariance and correlation LO 3.7 Covariance and correlation

• The covariance (sxy or xy) describes the direction

LO 3.7 Covariance and correlation LO 3.7 Covariance and correlation

• The population correlation coefficient rxy is

LO 3.1, LO 3.3, LO 3.7

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