QUANTITATIVE TECHNIQUES

Credits: 4 Hours: 60
Hours
Objective
To provide basic knowledge of quantitative mathematical tools and its applications
in business & management.

Module – 1
Matrices & Determinants 12 Hours
· Types of matrices
· Problems on addition, subtraction, multiplication of matrices
· Determinants – Concept, solution of simultaneous equations using Cramer’s
rule in two and three variables.

Module – 2
Ratio and Proportion 12 Hours
· Concept of Ratios- Duplicate, Triplicate, Sub duplicate and Sub triplicate
ratios, Related Problems.
· Proportion - Concept, Types, Continued Proportion, Third fourth and inverse
Proportion, Related Commercial problems.

Module - 3
Commercial Arithmetic 12 Hours
· Simple Interest
· Compound Interest including problems on Effective rate of interest and
variable interest rates.
· Annuities.
· Bill discounting
· Stocks and Shares

Module – 4
Analysis of UniVariate Data
Measures of Central Tendency-Mean,Median,Mode-Concept & Simple Problems
12Hours
Measures of dispersion
- Introduction, Types of dispersion measures – concept absolute and relative
measures
- Qualities of good measure of dispersion
- Range – Concept and simple problems
- Quartile deviation – computation of QD and its coefficient for raw, discrete
and continuous data
- Standard Deviation – Computation of SD and its coefficient for raw, discrete
and continuous data
Module – 5
Analysis of Bi Variate Data 12 Hours
· Correlation – Meaning & Types
· Spearman’s Rank correlation, Karl Pearson’s co efficient of correlation,
· Probable error
· Concurrent deviation method.
· Regression – Meaning
· Regression lines
· Properties of Regression lines and regression coefficient
· Related problems on regression lines and Regression coefficient.
Books for Reference
1. S P Gupta: Statistical Methods- Sultan Chand, Delhi, 41st Revised Edition,
2011
2. Dr. B N Gupta: Statistics (Sahityta Bhavan), Agra.
3. C B Gupta, Vijay Gupta: Statistics, Vikas Publications, 23rd Edition reprint
2011 or S C Gupta funds of State HPH, Edition, 2010
4. Dr. Asthana: Elements of Statistics, S Chand, 1st Edition
5. Dr. Sancheti&Kapoor: Statistics Theory, Methods and Application, Sultan
Chand 2009, 7th Edition
6. Business Mathematics, J K Singh, Himalaya Publications, 2nd Edition, 2011
Module – 1

Matrices and Determinants

Structure:
2.1 Matrices
2.2 Determinants
2.3 Terminal questions
2.5 Practice Problems

2.1 Matrices:

In Mathematics a matrix is a rectangular array of numbers, symbols, or expressions,

arranged in rows and columns. The individual items in an m × n matrix A, often
denoted by ai,j, where max i = m and max j = n, are called its elements or entries.

Provided that they have the same size two matrices can be added or subtracted
element by element. The rule for matrix multiplication, however, is that two
matrices can be multiplied only when the number of columns in the first equals the
number of rows in the second.

Applications: A major application of matrices is to represent linear transformations,

in the solution of systems of linear equations. Applications of matrices are found in
most scientific fields, including classical
mechanics, optics, electromagnetism, quantum mechanics, and quantum
electrodynamics, In computer graphics, they are used to manipulate 3D models and
project them onto a 2-dimensional screen. In probability
theory and statistics, stochastic matrices are used to describe sets of probabilities.

The different types of matrices are Square, Rectangular, Diagonal, Scalar, Unit,
Symmetric, and Skew-Symmetric.

2.2 Determinants:

Every square matrix is associated with a number called the determinant of the
matrix. There are 2 methods of finding the determinant: expansion &using the
properties of the determinant.

Determinants can be used to solve linear systems using Cramer's rule, where the
division of the determinants of two related square matrices equates to the value of
each of the system's variables.

Numerical Problems:
  5 3  6 8
Example 1: If A =   and B =   find out 2A + 3B
 4 6  9 1

 5 3 1 0 6 
Solution: 2A =2   =  
 4 6   8 1 2 

 6 8  18 2 4 
3B=3   =  
 9 1 27 3 

1 0 6   18 2 4 
Consider 2A+3B   +  
 8 1 2   2 7 3 

1 0  1 8 6  2 4   2 8 3 0
=   =  
 8 2 7 1 23 3 5 1 5 

 1 2 2 0
Example 2: If A    and B    find A1  B1
 1 3 1 5
1  1  2 1 
Solution: A1    , B1   
2 3 0 5

1 1  2 1 3 0
A1  B1         
2 3 0 5  2 8

 4 2 8 4
Example 3: If A    AB    Show that (A B) 1  B1 A1
6 4 6 2 

4 2 8 4  3 2  1 2 16  4 
Solution: Consider A B     
2 4 6 2 4 8  2 4 2 4  8

 4 4 2 0  4 4 7 2
  A B   
1
 
7 2 3 2  2 0 3 2 

3 2  1 2 4 8  2 4 4 4 7 2
Now  16  4 
 2 4  8  2 0 3 2 

  A B1  B1 A1

1 2 2
Example 4: Prove that A  2 1 2  satisfies the equation.
2 2 1 
A2 – 4A+5I = 0 where I is the identity matrix and 0 is the zero matrix.
Solution:
1 0 0 1 2 2
Let, I  0 1 
0 and Given, A  2 1 2
0 0 1 2 2 1
1 2 2 1 2 2
A  A. A  2 1 2 2 1 2
2

2 2 1  2 2 1

1  4  4 2  2  4 2  4  2 9 8 8

 2  2  4 4  1  4 
4  2  2  8 9 8
2  4  2 4  2  2 4  4  1 8 8 9

Consider, L.H.S =A2 – 4A + 51

9 8 8 1 2 2 1 0 0
 8 9 
8  4 2 
1 2  5 0 1 0
8 8 9 2 2 1 0 0 1
9 8 8 4 8 8  5 0 0
 8 9 8   8 4 8   0 5 0
8 8 9 8 8 4 0 0 5
9 8 8 9 8 8 0 0 0 
 8 9 8  8 9 8  0 0 0 
8 8 9 8 8 9 0 0 0
L.H.S. = R.H.S (proved)

3 4 x
Example 5: If 2 1 3  40 find x
 5 1 2

3 4 x
Solution: Given 2 1 3  40 
 5 1 2
1 3 2 3 2 1
3 4 x  40
1 2 5 2  5 1

3×5 – 4 ×19 + x × 3 = -40

 15 – 76 + 3x = -40
 3x = -40 + 61, x = 21/3, x =7

Example 6:
 1 1 1
Show that a b c  a  b  b  c  c  a 
2 2
a b c
c2c2 – c1, c3c3 – c1
1 0 0
 a (b  a) (c  a )
a2 (b 2  c 2 ) (c 2  a 2)
1 0 0
= b  a  c  a  a 1 1
a2 ba ca
c1  c1 " , c2  c2 " c3 "  c3  c2
1 0 0
 b  a  c  a  a 1 1
a2 bc cb
= b  a c  a c  b
 a  b b  c c  a R.H .S
 L.H.S. = R.H.S

Example 7: If 15 kgs of Commodity A and 17 kgs of Commodity B together cost Rs.

241 and 25 kgs of A and 13 kgs of B together cost Rs. 279. Find the prices of each
per kg by using Crammer’s rule method.

Solution:
Let price per kg of commodity A  x and commodity B  y
15x + 17y = 241 25x + 13y = 279
1 2
According to Cramer’s rule x  y
 

15 1 7
Δ  (15  1 3  2 5  17)  195  425  230
2 5 13
241 17
Δ1  (241  13  279  17)  3133  4743  1610
179 13
15 241
Δ2  (1 5  279  2 5  241)  4185  6025  1840
2 5 279

1  1610 2  1840
 x    7 y    8
  230   230

2  1 3 
Example 8: Find the adjoint of A  4  1 5  and verify
1  2 3
 A. adj A  adj A A  A I
Solution:
Co factor of 2 =  111  3  10   13
Co factor of -1 =  112 12  5   7
Co factor of 3 =  113 8  1  9
Co factor of 4 =  121  3  6  9
Co factor of -1 =  12 2 6  3  3
Co factor of 5 =  123 4  1  5
Co factor of 1 =  131  5  3   2
Co factor of 2 =  132 10  12  2
Co factor of 3 =  1 33  2  4  2

  13 7 9   13 9  2
 Adj A  9 3 
 5   7 3 2 
 2 2 2  9 5 2 

Now A 2 3  10  11 2  5  3 8  1

=  26  7  27  8
1   13 9  2
1
2 3
Consider, A( Adj A)  4 1 5   7
 3 2 
1 2 3 9 5 2 

8 0 0 1 0 0
= 0 
8 0   8 0 1 0  8 I

0 0 8 0 0 1
 13 9  2 2 1 3 
Again ( Adj A) ( A)   7 3 2  4  1 5
 9 5 2  1 2 3

8 0 0 1 0 0
= 0 0   8 0
 8 1 0  8 I
0 8 0 0 0 1
 A(adj A)  (adj A) A  A I

Example 9:
1 2  1
 1 1 2 
Find the inverse of 
2  1 1 

Solution:
 1 2  1

Let A   1 1 2 
2  1 1 

1 2 1
 A  1 1 2
2 1 1

= 11  2  2 1  4  11  2

= 3  1 0  1 1 4
Now the co-factors are

1 2
A11   1 2  3
1 1

1 2
A1 2     1  4   5
2 1

1 1
A13   1 2  1
2 1

2 1
A21     2  1   1
1 1
1 1
A2 2   1 2  3
2 1

1 2
A23      1  4   5
2 1

2 1
A31   4 1  5
1 2

1 1
A32     2  1   1
1 2

1 2
A33   1 2  3
1 1

 A 11 A 2 1 A 2 2  3  1 5 
 
 Adj. A   A1 2 A2 2 A 3 2   5 3  1
A   1 5 3 
 1 3 A 23 A 3 3 
 3  1 5
1 
 1
1 1 1
A  adj A A  5 3
A 14 
 1 5 3 

2.3 Terminal questions:

Section A
(1) Define matrix.
(2) What is row matrix?
(3) Give the meaning of column matrix.
(4) What is scalar matrix?
(5) Give the meaning of null matrix.
(6) What is a diagonal matrix?
(7) What is unit matrix? Give example.
(8) Give the meaning of column matrix.
(9) Give the meaning of triangular matrix?
(10) Give the properties of matrix multiplication.
(11) When do we say A is skew symmetric?
(12) What is a symmetric matrix?

Section B:
1 4  2 4
1. i f A    and B   4  B
5 6 0 6 
3  1 2 1 4 6 
2. I f A    and B    find 2 A  3B
3 1 2 1 3  1
9 1 1 5 
3. i f A    B  7 1 2 find a matrix such that 2A  5B  0
4 3  
1 4  2 4
4. i f 2 A  B    and A - 2B    find A and B
5 6 0 6 
 21 1 6 1   1 2  11 5
5. Solve for A and B I f 3 A  2 B    and B  
 21 2 1 2  1 16 8

 2 3 4 1 3 0
 
6. i f A  1 2 3 B  1 2 1 find a AB & BA
1 1 1 0 0 2
1 3
7. i f A   prove that A  A  31  0
2

1 0
7 0 
1  3 2
8. I f A    B  2  6 verify ( A B )1  B1 A1
 4 0 3 1 4 
  2 4 4
9. i f A  4 2 4 prove that A 2  8 A  2 0 l i s a null matrix.
4 4 2
4 3
2 1 3 
10. I f A    and B  0 6 Find A  B1 And A1  B
 3 4 5 5 7
Verify tha t A + B1 = A 1 + B.
1 2 3 
11. i f A   1 2 3  Show that A 2 is a null matrix.
- 1 - 2 - 3
0 1 2 
1 2. i f A  2  3 0  prove that A 2  4 A 2  A  1 2 l is a null matrix.
1 1 - 1
1 2  3 3 - 1 5
13. Find A B and B A if A  5 0 2  B  4 2 5
 
1 - 1 1  2 0 3
3 8 1  4 0 2
 
1 4. I f A  2  6 3 , B  6 2 3 verify 3 A  3 B  3(A  B)
7 4  5 1 3 2

Section C: Application Problems:

1. A company is to empty 60 labourers from either of the party A or B, comprising

persons in different age groups as under.

Category I (20-25 years) II (26-30 years) III (31-40 years)

Party A 25 20 15
Party B 20 30 10

Rate of Labour applicable to categories I, II and III are Rs. 1,200 Rs. 1,000 and Rs.
600 respectively. Using matrices, find which party is economically preferable over
the others.

2. Three firms A, B and C supplied 40, 35 and 25 truckloads of stones and 10, 5
and 8 truckloads of sand respectively to a contractor. If the cost of stone and sand
are Rs. 12,000 and Rs. 500 per truck load respectively; find the total amount paid by
the contractor to each of these firms by using matrix method.

3. At Bangalore, merchant ‘A’ has 300 bags Rice, 600 bags of wheat and 800 bags
of Ragi and another merchant ‘B’ has 250 bags, 700 bags and 1,000 of same food
grains. The prices (in Rs.) at three cities are:
 Rice Wheat Ragi
Mysore 100 90 80
Mangalore 110 80 70
Kolar 120 70 80

To which city each merchant will send his supply in order to get maximum gross
receipts. Solve by matrix multiplication method.

4. Two oil merchants have following stock of oil (in kgs)

Merchant Groundnut oil Sunflower oil Coconut oil

A 250 300 150
B 400 350 100

The approximate prices (in Rs. Per kg) three types oil in 3 markets:

Market Groundnut oil Sunflower oil Coconut oil

X 70 50 150
Y 60 55 110
Z 55 60 132

In which market each of the above, business a man has to sell their stocks to get
maximum receipt? Solve by multiplication method.

2.4 Practice Problems:

a bc 2a 2a
bca  a  b  c 
3
2b 2b
1. Show that 2c 2c ca b

2. Solve the following equation using Cramer’s rule:

a) 3x – y = 6, 2x – 3y = 15
b) x + 2y + 16 = 0, 2x + 4 = 3y
c) x  2 y  3z  6, 2 x  4 y  z  7, 3x  2 y  9 z  14

3. The price of 4 Mathematics books, 2 Accounting books, 3 Computer books is Rs.

134. The cost of 1 Mathematics, 3 Accounting and 2 Computer books is 81 and the
cost of 2 Mathematics books, one Accounting book and Computer books is Rs. 130.
Find the rate per book of each book.
4  2
4. Find the minor and co-factor of -2 in the matrix  
 3 18 
   2  3 4
5. Find the minor and co-factor of 4 in the matrix  3 2 7
 1 7 6

6. Find the adjoint of the following:

 1 4 7   7 2 5
 3 1 
a)  
 
b)  2 3 5 c)  6 1 6
 5 11   5 6 0  1 2 3

0 1 2 
7. Find the adjoint of 3 0 5 and show that A. adj A = adj A.A = A . I
1 4 6

11 4  3
8. Find the adjoint of  2 5 9  and show that A. adj A = adj A.A = A . I
 8  7 6 

9. Show that following matrices are singular

1 3 9
1 4   
a)   b ) 1 4 8
 4 1 6  1 5 7

10. Show that following matrices are non-singular:

2 - 1 - 1
1 5 
a)   b ) 3 1 1 
2 - 7  1 - 2 2 

11. Compute the inverse of the following:

1 3 2 1 - 1 0
3 2    
a)   b )  2 1 1  c )  2 - 4 4
- 2 - 3 5 2 3 0 1 2
12. Solve by Cramers rule:
a) 3x – y = 6, 2x + 3y = 15.
b) x + y + z = 6, x + 2y + 32 = 14, -x + y – z = -2.
c) x + y = 3, y + z = 5, z + x = 4.
d) x + y + z = 6, x – y + z = 2, 3x + 4y +8z = 5.
 MODULE – 2

RATIO AND PROPORTION

Structure:
3.1 Ratios
3.2 Types of Ratio
3.3 Proportion
3.4 Type of proportion
3.5 Terminal Questions

3.1 Ratios:

Ratios are just a comparison of two numbers. The comparison of two numbers or
quantities by division is known as the ratio. They are typically used when you are
comparing two things — like cost of one pair of shoes to another pair, or maybe
even the number of shirts you have compared to the number of jeans you have.

Symbol ‘:’ is used to denote ratio. For a ratio, the two quantities must be in the
same unit. If they are not, they should be expressed in the same unit before the
ratio is taken. A ratio may be treated as a fraction. Two ratios are equivalent, if the
fractions corresponding to them are equivalent. Four quantities are said to be in
proportion, if the ratio of the first and the second quantities is equal to the ratio of
the third and the fourth quantities.

The symbol ‘::’ or ‘=’ is used to equate the two ratios. The order of terms in a
proportion is important. For example 3, 8, 24, 64 are in proportion but 3, 8, 64, 24
are not in proportion. The method in which first we find the value of one unit and
then the value of the required number of units is known as unitary method.

Example:

The ratio of Rs 9 to 90 paise is 10: 1

The length and breadth of a steel tape are 10m and 2.4cm, respectively.
The ratio of the length to the breadth is 1250: 3

3.2 Types of Ratio:

1. Unit ratio
A unit ratio or a ratio of equality is one in which both the terms are equal.
2. Ratio of greater inequality
 A ratio of greater inequality is one in which the value of the antecedent term is
greater than value of its consequent term.
3. Ratio of lesser inequality
A ratio of lesser inequality is one in which the value of the antecedent term is
less than the value of its consequent term.
4. Inverse ratio
An inverse ratio is obtained by interchanging the antecedent and the
subsequent terms in a given ratio. This ratio is also called, ‘Reciprocal ratio’.

5. Compound ratio
A compound ratio is obtained by multiplying the antecedent terms, and the
consequent terms with the consequent terms of the given ratios.
6. Duplicate ratio
A duplicate ratio is obtained by squaring up the respective terms of a given ratio.
7. Sub-duplicate ratio
A Sub-duplicate ratio is obtained by taking the square roots of the respective
terms of a given ratio.
8. Triplicate ratio
A triplicate ratio is one which is obtained by taking cubes of respective terms of a
ratio.
9. Sub –triplicate ratio
A sub-triplicate ratio is obtained by taking the cube roots of the respective terms
of a ratio.
10. Continued ratio
A continued ratio is obtained by taking the relation between the magnitudes of
three or more quantities of the same kind.

Example problems:
Income of Ram is Rs.12000 per month and that of Kamal is Rs.191520 per annum. If
the monthly expenditure of each of them is Rs.9960 per month find the ratio of
their savings.

Monthly income of Ram = Rs.12000

Monthly income of Kamal = Rs.191520/12 = Rs.15960
Monthly savings of Ram = Rs.12000 – Rs.9960 = Rs.2040
Monthly savings of Kamal = Rs.15960 – Rs.9960 = Rs.6000

Ratio of savings = 2040: 6000 = 17: 50

The age of mother is thrice that of her daughter. After 12 years, the age of the
mother will be twice that of her daughter. What is the present age of the daughter
and mother?
Let Daughter’s age = x
Mother’s age y = 3x
After 12 years, mother’s age = 3x+12 = 2(x+12)  3x+12 = 2x+24  x = 12
Therefore, daughter’s present age is 12 and mother’s age is 36.

In a bag of red and green balls, the ratios of red ball to green ball are 3:4. If the bag
contains 120 green balls, how many red balls are there?

Red 3 x
= =  4x = 360  x = 90
Green 4 120

Therefore, the bag contains 90 red balls.

A special mixture contains rice and corn in the ratio of 2:6. If a bag contains 3
pounds of rice, how much corn it contains?

Rice 2 3
= =  2x = 18  x = 9
Corn 6 x

Therefore, the mixture contains 9 pounds of corn.

3.3 Proportion:

A proportion is an equation stating that two ratios are equal.

The equality of two ratios (fractions) is called proportion.
A proportion is a set of 2 fractions that equal each other.
If a : b = c : d, we write a : b :: c : d and we say that a, b, c, d are in proportion.

Here a and d are called extremes, while b and c are called mean terms.
Product of means=Product of extremes
Thus, a: b::c:d⟺(b∗c)=(a∗d)

3.4 Type of proportion:

1. Simple Proportion:
When the number of related terms remains within four it is a case of simple
proportion. the examples of such a proportion are : a : b : : c : d, and 3 : 4 : : 9 : 12.
2. Compound proportion:
When the number of related terms exceeds four, it is a case of compound
proportion. The example of such a proportion are : (i) a : b : : c : d : : e : f, (ii) 2
: 3 : : 8 : 12 : : 6 : 9
3. Continued Proportion
Three quantities are said to be in proportion if the ratio of the first to the second is
equal to the ratio of the second and third.

a, b and c are said to be in continued proportion if a : b = b : c

a b
if = , then b2 = ac
b c

Example: Find the third proportional to 9 and 15.

Solution:
The third proportional to 9 and 15 means the fourth proportional to 9, 15 and 15.
Let the fourth proportional be x. Then 9, 12, 12 and x form the proportion as thus,
9: 15 =15: x
9 15
=  9x = 180  x = 20
12 x
Thus, 20 is the third proportional to 9 and 15.
4. Direct proportion
In direct proportion as one value increases and the other value also increases.
Similarly, as one value decreases and the other value also decreases.
5. Indirect (Inverse) proportion
In indirect proportion as one values increases and the other values decreases. The
examples of inverse proportion are:

Examples:
Find the value of x if 2 : 5 :: x : 15
5x = 2×15  x = 6
What must be added to each of the four numbers 10, 18, 22, 38 to make them a
proportion?
Let x be added.
10+x 22+x
Then, =
18+x 38+x
380 + 48x + x2 = 396 + 40x + x2
x=2
Find the fourth proportional to 6, 10 and 12.
Let the fourth proportional to be x.
6 : 10 =12 : x
6x = 120 (Product of extremes is equal to product of means)
x = 20

A car takes to travels 200 miles in 4 hours. How long the car travels in 8 hours?
The proportional relationship is direct:
4x = 8 × 200  x = 400
Therefore, the car travelled 400 miles.
If it takes 5 days for 12 men to construct a compound wall. How many days it will
take for 6 men?
If number of men increases, the number of days to construct the wall would
decrease. Hence there is an indirect relationship.
Therefore, 5 × 12 = 6x  x = 10
Hence it will take 10 days for 6 men to construct the compound wall.

Divide Rs. 850 among 4 girls, 5 boys, and 6 teachers in such a way that the ratio in
shares of 1 girl, 1 boy and 1 teacher is 9: 8: 4.
Ratio of shares of 4 girls, 5 boys, and 6 teachers = 36 : 40 : 24  9 : 10 : 6
Sum of Ratios = 9 + 10 + 6 = 25
4 Girls’ share = 850/25×9 = 306
5 Boy’ share = 850/25×10 = 340
6 Teachers’ share = 850/25×6 = 204

3.5 Terminal Questions:

1. Write the duplicate and sub-duplicate ratio of 1:9.

2. A mixture of nuts and screws is in the ratio 4:3. If 7 screws are added to the
mixture, the ratio becomes 3:4. Find the number of nuts in the mixture.
3. The ratio between the ages of A and B is 6:5 and the sum of their ages is 44
years. Find the ratio of their ages after 8 years.
4. 2 men and 5 boys can do half a piece of work in 5 days, and 3 men and 4 boys
can do 1/3 of it in 3 days. How many days will 9 men take to do it all?
5. A travels 700 kms. By a bike and a bicycle in the ratio of 3 : 1. Find the distance
covered by each of the means.
6. If a : b =3 : 4, find the ratio (7x – 4y ) : (3x +y).
7. If x:y=5:3 and y:z=5:6. Find the ratio of x:y:z.
8. Divide Rs. 3,262 among X, Y and Z such that if Rs. 35, Rs. 15 and Rs.12 are
deducted from their respective shares, the remainders are in the ratio of 3: 5: 8.
9. Divide Rs. 1,890 in three parts such that three times of the first, five times of
the second, and six times of the third are equal.
10. A contractor engaged 150 labourers to raise an embankment 27 miles long in
90 weeks. The men are to work 8 hours a day for 6 days a week. At the end of
60 weeks it was found that 18 miles of the work had been finished. how should
the gang be reduced, if at all, to finish the work in time, if the men put in 9
hours a work a day, all days of week. ?
11. If 75 men can do a piece of work in 12 days of 10hours each how many men will
perform a piece of work twice as great in a tenth part of the time, if they work
the same number of hours a day, supposing that two of the second set can do
as much work in an hour as three of the first set ?
12. A. contractor undertook to do a work in 132 days and employed 168 men for
the same but, after 36 days he found that only a quarter of the work had been
 accomplished. How many more men should he employ to finish the work in
time?

Module – 3
Commercial Arithmetic

Structure:
4.1 Simple Interest:
4.2 Commercial Application of Simple Interest:
4.3 Terminal Questions:
4.4 Compound Interest:
4.5 Nominal rate of interest and Effective rate of interest:
4.6 Varying Rates of Interest:
4.7 Terminal Questions:
4.8 ANNUITIES:
4.9 Terminal Questions:

Learning Objective:
The main objective of this concept of simple interest, compound interest and
annuities are to make the student aware of their commercial application.

4.1 Simple Interest:

If the interest on a given principal at a given rate of interest is the same for every
year then this principal is said to be lent at simple interest at the said rate.
Formulae used in Calculating Simple Interest

1. Amount = Principal + Simple Interest S I = Simple Interest

2. Simple Interest = Amount – Principal P = Principal Amount
3. Principal = Amount – Simple Interest R = Interest Rate
PRT
4. S I 
100
S I x 100
5. P  T = Time in years
R x T

4.2 Commercial Application of Simple Interest:

Example 1:
Find the simple interest on Rs. 2,276 for 2 years 6 months at 12.5% p.a.

Solution:
Given, P = 2,276, R = 12.5% T = 2 years 6 months = 2.5 years.
 Px R x T
SI 
100
2,276 x 12.5 x 2.5
=
100
71,125
=  Rs. 711.25
100

Example 2:
1
A sum of money amounts of Rs. 855 in 3 years at the rate of 4% p.a., simple
2
interest. Find the sum.

Solution:
1 7
Given A = Rs. 855, R = 4, T  3 
2 2
A 855
We know that P  
 RT   4 x7 
1  100  1  2 x 100 
   

855 855
=   R s. 750
 14  1.14
1  100 
 

Example 3:
A person deposited Rs. 6200 on June 20th 2007. It amounted to Rs. 6250 on
September 1st 2007 at the rate of simple interest. Find the rate of interest.

Solution:
Here, P = Rs. 6250, A = Rs. 6350
 S I = Rs. 6350-Rs. 6250 = Rs. 100
T = Jun+Jul+Aug+Sep
1
= 10+31+31+1=73 days = years.
5
S I x 100 100 x 100 x 5
R   4%
P xT 6200 x 125

Example 4:
In what time will a sum Rs. 2000 amounts to Rs. 2240 at the rate of 4% p.a. simple
interest?

Solution:
Given P = Rs. 2000, A = Rs. 2240 SI = (2,240 – 2000) Rs. 240, R = 4%, T = ?
 S I x 100 240 x 100
T   3 years.
Px R 2000 x 4

4.3 Terminal Questions:

1. Find the interest on Rs.7434 for 8.75 years at the 2.5% interest per annum.
2. In what time a sum of Rs.9000 will amount to Rs.10575 at 5% per annum.
3. If the interest on certain principal in 8 years at 3.5% interest per annum is
Rs.77, what is the principal?
4. A sum of money becomes double in 20 years at simple interest, in how many
years will it triple?
5. A certain sum of money at simple interest amounts to Rs.5600 in 3 years and
to Rs.6000 in 5 years. Find the principal and rate of interest.
6. A sum of money amounts to Rs.855 in 3.5 years at 4% simple interest per
annum. Find the sum.
7. A man lent Rs.8000 for 3 years and Rs.6300 for 5 years to two persons at the
same rate of interest. He received Rs.415 more as interest from the one than
what he received as interest from the other. What is the rate of interest per
annum?
8. A depositor placed a sum of Rs. 50000 into his savings A/c with a bank on12th
March 2004 and withdraw the entire balance in his A/c on 29th June 2004.
The bank rules permit simple interest at 3.75% p.a. How much did he
withdraw from his account?
9. Find the period in which Rs. 5500 will amount to Rs. 6050 at 4% p.a.
10. An investment became Rs. 43520 at the end of the 3rd year and Rs. 51200 at
the end of the 5th year. Find the investment and the rate of simple interest.

11. Find the simple interest on Rs. 300 at 8% p.a. for 14 weeks.
12. M borrowed Rs. 12,650 from a money lender at 18% p.a. simple interest.
After 3 years, he paid Rs.10,381 and gave a buffalo to clear off the debt.
What is the cost of the buffalo?
13. A person borrowed Rs. 6,400. After 2 years and 3 months he paid Rs. 6136 in
1
cash with a horse and cleared the amount. If the rate of interest was 3 %
2
p.a. Find the value of the horse.
14. If simple interest is Rs. 360 for 2 years @ 6% p.a. Find the sum.
15. At what rate of simple interest will Rs. 800 amount to Rs. 836 in 9 months?
16. A sum of money lent out at S. I amounts to Rs. 3,224 in 2 years and Rs. 4,160
in 5 years. Find the sum and the rate of interest.
17. In what time will Rs. 800 amount to Rs. 896 at 6% P.A. simple interest?
18. A man left Rs. 1,30,000 for two sons aged 10 years and 16 years with the
direction that the sum should be divided in such a way that the two sons get
the same amount when they attain the age of 18 years. Assuming the rate of
 1
simple interest is 12 % p.a. Calculate how much the elder son got in the
2
beginning.

Answers for the Terminal Questions:

1. 1626.19
2. 3.5 years
3. Rs.275
4. 40
5. Rs.5000 & 4%
6. Rs.750
7. 5.5
8. Rs. 50558.4
9. 2.5 years
10. Rs. 32000, 12%

4.4 Compound Interest:

Definition of Interest
Interest is the compensation received by the lender of money from the borrower,
calculated at a specified rate of percent and for a specified time, on the sum of
money lent by the lender to the borrower.

Calculation of Compound Interest

We will be using the following symbols in the ensuing text and problems on Simple
and Compound interest.

P= Principal (or, the present value of the money lent)

n= Number of periods for which the money is lent
r= Rate of interest percent per annum, expressed as a decimal
I= Rupees of interest earned for the interest period
F= Amount to be received (Future value) at the end of ‘n’ periods.

Important Formulae in Compound Interest

(a) To find the amount due after ‘n’ years, where ‘n’ is a positive number.
F = P1  r  n
(b) To find the present value (or, the Principal) when Fn, r and ‘n’ are given

Fn
P=
(1  r ) n
(c) To find the value of ‘r’ when F, P, and ‘n’ are given
 log F  log P 
r  Anti log   1
 n 
(d) To find the value of ‘n’ when F, P, and ‘r’ are given
 log F  log P 
n 
 log (1  r ) 

Example 1:
Calculate the amount and compound interest on Rs. 100 for 15 years, allowing
compound interest at the rate of 12% per annum.

Solution :
Given P  Rs. 100
n  15 years
r  12% = 12/100 = 0.12

Required to find (i) Fn and (ii) I

(i) F  P(1  r ) n
 F  100 (1  0.1 2)15  100(1.1 2)15
  Anti log [log 100  15 Log 1.12]
 A.1[2.0000  15 (0.0492 ) ]
 A.1 [2.7380 ]
 R s. 547.00
(ii) I  FP
= Rs. 547.00 – Rs. 100.00
= Rs. 447.00

Example 2:
Given F  Rs. 800
P  Rs. 500
n  3 years

Required to find ‘r’

 log F  log P 
r  Anti log   1
 n 
 log 800  log 500 
 A.I .   1
 3
2.9031  2.6990 
= A I    1
 3
 A..I . (0..0680 )  1
= 1.1695-1 =0.1695

To find r%  0.1695 x 100 = 16.95%

Example 3:
In how many years will Rs. 500 amount to Rs. 881.17 at 12% per annum compound
interest?

Solution:

Given F  Rs. 881.17

P  Rs. 500.00
r  12% = 0.12
Required to find 'n'
 log F  log P 
n 
 log (1  r ) 
log 881 .1 7  log 500
=
log 1.2
2.9450  2.6990
=
0.0492
n = 5 years
Example 4.
Find the difference between compound and simple interest on Rs. 5000 invested
for 4 years at Rs. 8% per annum.
Solution:
Given P  Rs. 5000
n  4 years
r  8% = 0.08
Required CI – SI =?
Using the formula shown in 7.3, the differential interest ‘I’ can be calculated as
follows:

I  P [ (1  r n )  (1  rn ) ]
 5000 [ (1.0 8) 4  (1  0.0 8 x 4) ]
Now (0.0 8) 4
= Anti log (4 log 1.08)
= A.I ( 4 x 0.0334)
= A. I (0.1336) = 1.3601
I = 5000 [1.3601 – 1.3200]
I = 5000 (0.0401)
= Rs. 200.50

4.5 Nominal rate of interest and Effective rate of interest:

Nominal rate of interest is the rate of interest received when the conversion period
is one year. On the other hand, when the conversion period is less than one year
(i.e., when interest is computed at lesser frequency than one year), the realized rate
of interest is the Effective rate of interest which will be greater than the Nominal
rate. The Effective rate of interest can be computed as follows:
q
 R
r  1   - 1
 q
Where
R=Nominal rate of interest (i.e., the contracted of the agreed rate of interest)
r= Effective rate of interest
q= The Number of times interest is computed in a year
i.e., the number of conversion periods in a year.
Example1.
Find the Nominal and Effective rates of interest in each of the following cases.
i) Rs.1000 lent at 12% p.a, interest payable half-yearly
ii) Rs.75. lent at 8% p.a, interest payable quarterly
iii) Rs.5000 invested at 18% p.a, interest payable monthly

Solution:
i) Given: R=12%(nominal rate of interest), r= Effective rate of interest,
q=2
Effective rate of interest can be computed as follows:
q
 R
r  1    1
 q
2
 0.12 
r  1  1
 2 
r  1  0.0 6 2  1
r  1.0 6 2  1
r  1.1236  1
r  0.1236
r= Effective rate of interest=12.36%

ii) Given: R=8%(nominal rate of interest), r= Effective rate of interest,

q=2
Effective rate of interest can be computed as follows:
q
 R
r  1    1
 q
4
 0.0 8 
r  1  1
 4 
r  1  0.0 2  1
4

r  1.0 2  1
4

r  1.08243  1
r  0.08243
r= Effective rate of interest=8.24%
iii) Given: R=18%(nominal rate of interest), r= Effective rate of interest,
q=12
Effective rate of interest can be computed as follows:
q
 R
r  1    1
 q
12
 0.1 8 
r  1  1
 1 2 
r  1  0. 0 1512  1
r  1.015 1 2  1

4.6 Varying Rates of Interest:

It may be possible that the interest rate may change during the period of loan (or,
investment). In such a case, the compound interest formula may be used by merely
adding as many compounding factors as are equal to the number of interest rate
changes. For instance, if ‘p’ is the original amount lent, ‘r’ is the interest rate for ‘n1’
interest periods, ‘r2’ is the interest rate for ‘n2’ interest periods, ‘r3’ is the interest
rate for ‘n3’ interest periods, and so on, the compound interest formula can be
written as follows:
F  P 1  r1  1 1  r2  1  r3 
n n2 n3

Example 1
A person deposits a sum of Rs. 1,000 in a bank account. For long-term deposits, the
bank offers compound interest at the rate of 8% per annum for first 3 years, at the
rate of 10% for the next 3 years and from the 7th year onwards, at the rate of 12%
per annum, If the person makes a 10 years deposit, how much will he receive at
the end of the 10th year?
Solution: Given
P = Rs1,000
r1 = 8% = 0.08 ; n1 = 3 years
r2 = 10% = 0.1 ; n2 = 3 years
r3 = 12% = 0.12 ; n3 = 4 years
F = p (1 + r1) 1 (1+r2) 2 (1+r3)n3.
n n

= 1000 (1.08)3 (1.10)3 (1.12)4

= A.1[log 1000+3 log 1.08+3 log 1.10 + 4 log 1.12]
= A.1[3.0000 + 0.1242 + 0.1968]
= a.1 (3.4212) = Rs 2,637.55

4.7 Terminal Questions:

1. Find the amount of Rs. 55000 in 8 years at 12% per annum interest
compounded.
2. Calculate the compound interest on Rs. 75000 at 14% for 4 years.
3. What is the present value of Rs. 10000 due after 1 year if the compound interest
is reckoned at 12%? What will be the present value if Simple Interest is allowed
instead of compound interest? Do you find any difference? What are the
reasons?
4. What is the present value of an amount of Rs. 10,000 payable after 5 years if the
compound interest rate allowed is 14% per annum.
5. A sum of money Rs. 50000 was lent at compound interest of 15% per annum for
42 months. What is the amount due?
6. Find in how many years Rs. 30000 will become Rs. 300000 at 9% per annum
compound interest.
7. Mr. Dhoni borrowed Rs. 50000 from a money lender but could not repay any
amount in a period of 4 years. The money-lender is now demanding Rs. 75000
from him. What is the compound interest rate percent per annum charged by
the money lender?
8. Find the difference between the simple and compound interest on Rs. 25000 for
3 years at 10% per annum.
9. Karnataka Bank issued a Bond of a face value of Rs. 50000 which will amount to
Rs. 28,0000 in 10 years. Assuming that interest is computed annually, what is the
annual rate of interest accruing to the investor?
10.A certain sum of money invested today amounts to Rs. 3763.00 in 2 years and to
Rs. 4720.00 in 4 years. Find the principal and the compound rate of interest
allowed.
11.J.K.Ltd, issued discount bonds of a face value of Rs. 28,000 each at a discounted
price of Rs. 5000, with a maturity period of 10 years. In addition, 2.5% of Rs.
5000, i.e., Rs. 125 would be payable to the allottees as upfront discount at the
time of allotment. What is the annual realized rate of interest to the investor if
he chooses to hold the bond for 10 years’ time?
12.The Discount Bonds of J.K.Ltd mentioned in Exercise No. 11 have an inbuilt
option of early withdrawal by the investor. Accordingly if the investor exercises
this option, he would be paid Rs. 13,500 at the end of the sixth year or Rs.
19,500 at the end of eight year. What, then, is the realized rate of interest? The
discounted price remains the same as Rs. 5000 for any of the options, with an
additional upfront discount of Rs. 125 allowed at the time of allotment.
13.Find the effective rate of interest of i) 6% payable quarterly ii)8% payable half
yearly
14.A Person deposits a sum of Rs. 1,0000 in a bank account. For long-term deposits,
the bank offers compound interest at the rate of 5% per annum for first 5 years,
at the rate of 6% for the next 4 years and from the 7th year onwards, at the rate
of 7% per annum, If the person makes a 10 years deposit, how much will he
receive at the end of the 10th year?
15.A person wishes to have 12500 in cash 5 years hence. He has decided to open a
fixed deposit account with a bank that pays 12% per annum as interest. If the
 bank compounds interest once in six months, how much should he deposit in
the bank today?
16.Calculate compound interest and the amount for an investment of Rs.20000 for
a period of 4 years. The rate of interest is first two years 10% and the next two
years 12%. The interest compounded annually for first two years and half yearly
for the last two years.
17.What principal invested today will amount to Rs. 1630.80 in 4 years at 13% per
annum compound interest?
18.Find the amount due 5 1 years hence on Rs.1000 at 14% per annum compound
2
interest.
19.National Savings Certificates (VIII issue) of a face value of Rs. 100 will pay Rs.
201.50 exactly six years hence. What is the rate of compound interest paid?
20.At what rate per cent per annum will a sum of money double itself in 5 years if
lent at compound interest?
21.In how many years will a sum of money double itself if compound interest is
applied at 8% per annum?

Answers
1. Rs. 136177.9
2. Rs. 51672
3. Rs. 8928.57
4. Rs. 5193.7
5. Rs. 81547.8
6. 26.72 Years
7. 10.67%
8. Rs. 775
9. 18.8%
10.Rs.3000,12%
11.19.10% Hint: Rs. 4875 should be taken as the present value
12.Withdrawal after 6 years: 18.5% / after 8 years: 18.92%
13.i) 6.13%, ii) 8.16%
14.17241.22
15.Rs. 6980.90
16.Rs. 10552.50

4.8 ANNUITIES:

An annuity is a series of equal payments at regular intervals guaranteed for a fixed

number of years. Example: Regular deposits to a savings account, monthly home
mortgage payments, monthly insurance payments, pension payments.
1. Annuity Certain: An unconditional agreement to make a fixed (finite) number of
annuity payments, either at the beginning or at the end of the period, is called
an Annuity Certain
2. Annuity Contingent: If the Payment of an annuity or the duration of annuity
Payments or both are subject to the happening of any event, the annuity is
called annuity contingent.
3. Perpetuity: An annuity which is for an infinite period is called Perpetuity.
4. Deferred Annuity: When the annuity payments begin only after the lapse of a
certain specified period of time, the annuity is called Deferred Annuity.
5. An Annuity Certain can be further classified as follows:
a) Annuity Immediate: When the annuity payments are payable at end of
each stipulated time period, it is called an Annuity Immediate.
b) Annuity Due: When the annuity payments are payable at the beginning of
each stipulated time period, it is called an annuity due.

Future value of Annuity Immediate

A [ (1  r ) n  1]
F= .. ……..(1)
r

Example 1. Calculate the amount of on annuity of Rs. 5000 for 15 years, if the rate
of interest is 12% p.a.

Solution Nothing is mentioned about the type of annuity. Therefore it should be

taken as Annuity Immediate.
Given Annuity (A) = Rs.5000
N = 15 years and r = 0.12
A [ (1  r ) n  1]
F= (1.12)15 = A.1(15 log 1.2)
r
5000 [ (1.1 2) 15  1]
= = A.1 (15×0.0492)
0.1 5
5000 [5.4702  1]
= = A.1 (0.7380)
0.15
5000  4.4702
= =5.4702
0.15
F = Rs 1, 49, 006.67

Present value of an Annuity Immediate

A [ (1  r ) n  1]
 P (PVP) =
r (1  r ) n
Example 1. What is the present value of an annuity of Rs. 2000 for 5 years at 12%
p.a?

Solution: Nothing is said about the type of annuity. Therefore it should be taken as
an annuity immediate.

Given Annuity (A) = Rs.2000

r = 0.12
n = 5 years
p= ?
A[ (1  r ) n  1]
P=
r (1  r ) n
2000 [ (1  0.1 2) 5  1]
=
(0.1 2) (1  0.1 2) 5
2000 [ (1.1 2) 5  1]
=
(0.1 2) (1  0.1 2) 5
2000 [1.7620 )  1]
= = Rs 7207.72
(0.1 2) (1.7620 )

Future value of annuity Due

A [ (1  r ) n  1]
F (1  r )
r
Example 1:
Suppose you open a Recurring deposit A/c with a company and put in Rs.
1000 at the beginning of each year for 5 years. The company agrees to pay
interest of 15% p.a. How much will you get at the end of 5 years?

Solution :
Payments will be made at the beginning of each year.
Therefore it is an annuity due.

A [ (1  r ) n  1]
F  (1  r )
r
1000 [ (1  015) 5  1]
= (1  015)
0.1 5
1000 [ (1.15) 5  1] (1.1 5)
=
0.15
1000 (1.1631)
=
0. 1 5
F = Rs. 7753.75

Present Value of Annuity due

In this case also the “Present value of an Annuity Immediate multiplied by (1+r) will
yield the present value of an annuity due”

A [ (1  r ) n  1]
 P (1  r )
r (1  r ) n
Example 1:
Supposing you expect to receive an annuity of Rs. 1000 p.a. for 5 years, each
receipt occurring at the beginning of the year. The discount rate is 12% What
is the percent value of this annuity?

Solution :
The annuity is receivable at the beginning of each year. Therefore it is an
annuity due.
1000 [ (1.1 2) 5  1]
 (1.1 2)
(0.1 2) (1.1 2) 5
1000 (0.7623) (1.1 2
=
(0.1 2) (1.7623)
853 .8 2
=
0.2115
= Rs. 4037.00

Perpetuity

Future Value of a Perpetuity does not exist (it is an infinite value).

However the Present Value of Perpetuity can be found by the following formula.

A
P 
r
Where P is the present value of perpetuity.

Example 1 :
What is the present value of an income of Rs. 2000 a year to be received for
ever? Assume the discount rate to be 16%.

Solution :
The income is to be received forever. Therefore it is perpetuity. The present value
of a perpetuity is
A 2000
P    R s. 1 2,500
r 0.16
4.9 Terminal Questions:

1. Calculate the present value of an annuity of Rs.3000 for 6 years at 14% p.a.
2. A machine costs Rs.25,000. It will yield cash profit of Rs.7500 p.a for the next 5
years. If the interest rate is 18% p.a., would you consider investing in the
machine?
3. A person wants to provide for his daughter’s college studies which will require
Rs.10,000p.a for 5 years. The money will be needed one year from now. How
much should he deposit in his bank account now in such a way that the account
will be closed at the end of 5 years? Bank allows compound interest at the rate
of 12% p.a
4. A person on his retirement has become eligible to receive an annuity of
Rs.12,000 p.a from his employer towards pension.. This pension will be payable
only for 10 years. Alternatively, the employee will be paid a lump sum amount
on the date of retirement in lieu of annual pension. If the current discount rate
is 14% p.a., what should be paid to the retiring employer in a lump sum, if he
opts for such a scheme.
5. A farmer borrows Rs.30.000 at a concession rate 6% p.a from government to
make improvement on his agriculture land. This type of loans is to be repaid in
20 equal installments beginning at the end of the year. What is the value of
each installment?
6. What is the present value of an annuity of Rs. 2000 @ 5% compound interest
per annum? The payment being made for 10 years, at the beginning of the year.
7. A person deposits Rs.5000 at the beginning of the each quarter in his savings
account in a bank which pays 8% interest per annum compounded quarterly.
Find the balance at the end 3 years.
8. What equal payments at the beginning of each year for 10 years will pay for a
piece of property priced at Rs.600000, if money is worth 5% effective.
9. What is the perpetuity of Rs. 500 at 5% C.I. per annum?
10. At what rate converted semi-annually will the present value of a perpetuity of
Rs. 675 payable at the end of each 6 months be Rs.30000?
11.Calculate the present value on Jan 1, 2011 of an annuity of Rs500 paid at the end
of each month of the calendar year 2011. The annual interest rate is 12%.
12.A certain amount was invested on Jan 1, 2010 such that it generated a periodic
payment of Rs1,000 at the beginning of each month of the calendar year 2010.
The interest rate on the investment was 13.2%. Calculate the original investment
and the interest earned.
13. Alan decides to set aside Rs.50 at the end of each month for his child’s college
education. If the child were to be born today, how much will be available for its
college education when s/he turns 19 years old? Assume an interest rate of 5%
compounded monthly.
14.Mr A deposited Rs.700 at the end of each month of calendar year 2010 in an
investment account of 9% annual interest rate. Calculate the future value of the
annuity on Dec 31, 2011. Compounding is done on monthly basis.
15.Calculate the present value on Jan 1, 20X0 of a perpetuity paying Rs.1,000 at the
end of each month starting from January 20X0. The monthly discount rate is
0.8%.
16.A Company needs Rs. 10, 00, 000 at the end of 5 years from now. It would like
to set aside an equal amount each year from out of its profits. If the present
market rate of interest is 16%, how much should be annual amount to be
invested?
17.A machine purchased at a cost of Rs. 75, 000 has a productive life of 8 years
after which its scrape value is estimated to be nil. Assuming that costs are
1
expected to go up by 33 % over the next 8 years, how much depreciation
3
should annually be set aside out of profit as depreciation found so as to provide
enough money to place the asset after 8 years? The amount set aside annually
can be invested at the rate of 14% p.a.C.I.
18. An investment which requires an initial outlay of Rs.1,00,000 will yield an
annuity of 20,000 for 12 years. If the discount rate is 14% p.a. should we accept this
investment proposal?
19. An insurance company offers an annuity scheme called the Jeevan Raksha
Scheme. One of the options in this scheme is as follows. If a lump sum amount is
paid now, commencing from the end of year, the company will pay an annuity of
Rs.12,000 p.a, annuitant’s life expectation is 15 years. How much should be
deposited in lump sum now? If the interest rate is 9% per annum.
20. What is the future value of an annuity of Rs. 2500 p.a. payable at the beginning
of each year for 10 years if the rate of interest is 16% p.a. compounded quarterly?
21. Calculate the present value of an annuity due of Rs. 750 p.m. for 25 months if
the interest rate is 12% p.a.
22. A travelling salesman bought a motor cycle under a hire purchase scheme,
where in he has to pay Rs. 1500 per month for 40 months, each payment payable at
the beginning of the month. If the dealer has charged interest at 18% p.m., what is
cash price of the motor cycle? (There is no initial payment and ignore
documentation and other charges)
23. A person repaid his loan in 5 equal annual installments starting from the
beginning of the first year. If each installment was Rs. 50,000 and the compound
interest charged was 12% p.a., what was the amount borrowed?
24. A person desires to endow a bed in a Hospital the cost of which is Rs. 6000 p.a.
If the money is worth 12% p.a., how much should he provide in perpetuity?
25. What must be deposited today in order to earn an annual income of Rs. 7,000,
in perpetuity, beginning from the end of 15 years from now? Interest rate is 14%
p.a.

Answers for the terminal questions:

1. 11,665.83
2. P.V= Rs 23,454.11; Benefit is less than cost. Therefore it is not profitable to
invest in the machine
3. Rs 36,048.60
4. Rs, 62,593.38
5. Rs.2615.56
6. 16220
7. 6840
8. 74,005
9. 10000
10. 4.5%
11. 5,627.54
12. 11,307.32; 692.68
13. 17,460.10
14. 6566.48
15. 125,000

Structure:
5.1 Bill Discounting
5.2 Some of the basic concepts
5.3 Terminal Questions
5.4 Stocks and Shares
5.5 Distinction between Stocks & Shares
5.6 Terminology

5.7 Terminal Questions

5.1 Bill Discounting:

Bills of Exchange is a non-interest bearing written order to a person requiring them

to make a specified payment to the signatory or to a named payee; a promissory
note.

5.2 Some of the basic concepts:

1. Bill of Exchange
A bill of exchange (or Hundi) is a negotiable instrument by which one person (the
Drawee or the Acceptor) undertakes to pay another person (the drawer or banker)
a certain sum of money at a specified date.
2. Drawing date: The date on which the bill is drawn

3. Bill Period: The period after which the bill is due

4. Legally due date: Drawing date +Bill period + grace period of 3 days

5. Bill amount: It is the Face value of the bill

6. Discount date: In order to meet one’s financial urgency, the drawer of the bill can,
instead of holding the bill till its legally due date, take it to a banker and get it
discounted. The date on which the banker discounts the bill is called the ‘Discount
date”.

7. Discount period: It is the period starting from the discount date and ending on
the legally due date. It is the period for which banker lends money to the drawer of
the bill against the bill. It is calculated by counting the number of days from the
date of discount till the legal due date. Denoted by‘t’. Banker calculates Simple
interest (i.e, discount) for this period.

8. Discount rate: It is the simple interest charged by the banker for discounting the
bill. It is the usual lending rate of the banker. Technically, the discount rate is the
rate at which the future amount due on the bill (i.e., the face value) is discounted to
its present value.

9. Discount: Discount is of two types

(a) Banker’s Discount (BD)
(b) True Discount (TD)
(a) Banker’s Discount: it is the simple interest calculated by the banker on the “Face
Value “of the Bill (F).
(b) True Discount (TD): True discount is the difference between the face value of the
bill and the present worth. It is the interest calculated on the true present value.
The difference between BD and TD is called the “Banker’s gain”.
10. Present value (present worth): present value is of two types
(a) Banker’s present value
(b) True present value.

(a) Banker’s present worth:

Also known as the “Discounted value of the bill’, it is the difference between the
Face value and discount charged and deduct the discount amount from the face
value of the bill and pay only the net amount to the trader.
(b) True Present value:
The principal amount on which interest should have been computed is the true
present worth.
F
True present worth (p) =
1 t r
11. Banker’s Gain (BG):
Banker’s gain is the difference BD and TD
∴ BG = BD –TD
It is also equal to interest on TD
BG = TD. t. r
Example 1.Find (1) the true present worth and (2) discounted cash value for
Rs.512.50 due six months hence at 15% p.a0

Solution:
Given Face value of the bill F = Rs.512.50
1
t =6 months = Years
2
r = 15% = 0.15

F
(1) True present value =
1 t r
512.5 0
=
1
1   0.15
2
= R s.476.7 4

(2) Discounted face value of the bill

Or

Cash value of the bill =F(1-tr)

=F 1   0.15 
1
 2 

 512.5 0(0.925)  R s.474.0 6

Example2. What is the True discount on a bill of Rs.415 due 9 months hence at
15%p.a?

Solution: To find the TD, we first need to find the true present values
F 415
p   R s.373.0 3
1 t r 9
1   0.15
12
Td is interest on True Present value
∴ TD = p t r
9
= 373.0 3   0.15  R s.41.9 7
12

Example 3.
A bill for Rs. 1713.75 was drawn on 3.4.96 and made payable 3 months after date. It
was discounted on 15.4.96 at 16.5% p.a. What was the discounted value of the bill
and how much has the banker gained on this transaction.
Solution:
In this problem, date of drawing, bill period, date of discounting have been given.
We have to determine the legally due date and discounted period.
Legally due date = Date of drawing + bill period of 3 months
+ grace period of 3 days
= 3 – 4 – 96
+0–3- 0
+3–0- 0

Legally due date = 6 – 7 - 96

Discount period = No. of days from date of discounting to legally due date.

Discounted on 15 April 1996

(15.4.96 to 30.4.96) April 15 days
May 1996 31 days
June 1996 30 days
th
Due on 6 July 1996 6 days

82 days

(a) Discounted value of the bill = F (1  t r )

1713.75 1  
82
=  0.165 
 365 
= 1713.75 (0.9629)
= Rs. 1650.2239

(b) Banker’s gain= BD-TD

BD =Ftr
82
= 1713.7 5   0.165
365
= 63.53

TD=p.t.r

F
(i) p =
1 t r
1713 .7 5
=  R s.1652 .5 0
82
1  0.165
365

(ii) TD = p.t.r
82
= 1652.50 × × 0.165
365
=Rs. 61.26
BG = BD - TD
 = 63.53 – 61.26
= Rs. 2.27
Example 4.
A bill for Rs. 14,600 drawn at three months after date was discounted on 11-11-95
for Rs. 14,320. If the discount rate is 20% p.a., on what date was the bill drawn?

Solution:
Given F =Rs. 14,600
Discount value =Rs. 14,320
BD =F-DV
=14,600 – 14,320
= Rs. 280

BD = F . t. r
280 = 1 4,600 X t x 0.2 0
280 = 2920 t
280
 t In days = x 365
2920
= 35 days
Discount period = 35 days

The date of discounting is given to be 11 - 11 - 95

 Legally due date must be 35 days after 11 - 11 -95

Hence Legally due date = Nov (30 - 11) = 19

days
Dec = 16 days
35 days

 Legally due date = 16 - 12 - 95

Now working backwards,

Legally due date - Grace Days - Bill period = Date of drawing

 Date of drawing =16 - 12 - 95 legally due date

(-) 3 - 0 - 0 Grace Days
(-) 0 - 3 - 0 Bill period
13 - 3 - 95

Example 5:
A banker pays Rs. 2340 on a bill of Rs. 2500, 146 days before the legally due date.
What is the rate of discount charged by the banker?
Solution:
Face value F= Rs. 2500
Discounted Value= Rs. 2340
t = 14 days r = ?
BD = Face value - Discounted value
= 2500 – 2340 = Rs. 160
BD = F . t. r
146
160 = 2500 x xr
365
160 x 365
 r   0.1 6
2500 x 146
 r = 16%

5.3 Terminal Questions:

1. Find the present value of Rs. 750 due 4 months hence at 15% p.a.
2. Find the Banker’s discount on Rs. 900 due 5 months hence at 16% p.a.
3. What is the true discount Rs. 900 due 5 months hence at 16% p.a? (At what rate
was the discount calculated when Rs. 825 is accepted in lieu of Rs. 900 due 3
months hence?
4. What is the banker’s discount and what is the present value received in cash for a
bill of Rs. 1000 due on 18th February 1993 if discounted on 7th December 1992, at
15% p.a.
5. True discount on a certain sum due one year hence at 15% is Rs. 25. What is the
Banker’s discount on the same sum due one year hence at the same rate and
what is the sum due?
6. The Banker’s and true discount on a sum of money due 3 months hence are
respectively Rs. 154.50 and Rs. 150. Find the sum of money and the rate of
interest.
1
7. If the banker’s gain on a bill is th of the Banker’s discount, the rate of interest
9
being 10% per annum, find the unexpired period of the bill.
8. A bill for Rs. 765 at 90 days sight was presented for acceptance on 16th January
and was discounted on 14th March 1994. How much was received for it, the
discount rate being 12% p.a.
9. A bill of Rs. 5000 drawn on 10 – 4 -96 at 3 months was discounted on 1 – 5 – 96
at 12% p.a. For what sum was bill discounted and how much did the banker gain?
10. A bill for Rs. 5050 was drawn on 13th July for 5 months. It was discounted by a
banker on 4th October at 15% p.a. Find the Banker’s gain, Banker’s present value
and the true present value.
11. A bill for Rs. 14,600 drawn at 3 months was discounted on November 11th for
Rs. 14,544. If the rate of simple interest is 4% p.a., on what date was the bill
drawn?
12. A banker discounts a bill for a certain amount having 32 days to run before it
matures at 15% p.a. the discounted value of the bill is Rs. 995.90. What is the
face value of the bill?
13. The banker’s gain on a certain bill due 6 months hence is Rs. 20, the rate of
interest being 20% per annum. Find the face value of the bill.
14. A bill for Rs. 3225 was drawn on 3rd February 1995 at 6 months date and
discounted on 13th March 1995, at the rate of 18% per annum. For what sum was
the bill discounted and what is the Banker’s gain on this bill?
15. The true discount on a bill was Rs. 100 and the banker’s gain on this bill was
Rs. 10. What is the face value of the bill?
16. A bill for Rs. 2920 was drawn on September 11th for 3 months after date and
was discounted at 16% p.a. for Rs.2875.20. On what date was the bill
discounted?

Answers for the terminal questions:

1. Rs, 714.29
2. Rs. 60.00
3. Rs. 56.25
4. 30;Rs. 970.87
5. Rs 28.75 and Rs. 191.67
6. Rs. 5150, 12% p.a.
7. 15 months
8. Rs. 755.95
9. Rs. 4880; Rs. 2.82
10. Rs. 4.41; Rs. 4898.50 and Rs. 4902.91
11. 13th September

5.4 Stocks and Shares:

DEFINITION OF STOCKS & SHARES

STOCK: Stock is a general term used to describe the ownership certificates of any
company. Stock is a mere collection of the shares of a member of a company in a
lump sum. When the shares of a member are converted into one fund is known as
stock. So, if investors say they own stocks, they are generally referring to their
overall ownership in one or more companies.
SHARES: Shares refers to the ownership certificates of a particular company A Share
is defined as the smallest division of the share capital of the company which
represents the proportion of ownership of the shareholders in the company. The
shares are the bridge between the shareholders & the company.

5.5 DISTINCTION BETWEEN STOCKS & SHARES:

Basis for comparison Stock Shares

Meaning The conversion of the The capital of a company

fully paid up shares of a is divided into small units
member into a single which are commonly
fund is known as stock. known as shares.

Is it possible for a No Yes

company to make
original issue?
Paid up value Stock can only be fully Shares can be partly
paid up. /fully paid up.

Definite number A stock does not have A share have a definite

such number. number known as
Distinctive number.

Fractional transfer Possible Not possible

Nominal value No Yes

Denomination Unequal amounts Equal amounts

5.6 Terminology:

Debentures: Debentures are long-term security yielding a fixed rate of interest,

issued by the company & secured against assets. Every person who lends an
amount is given a certificate of loan called debentures.
Face Value of Shares: It is the price at which shares are first issued by a company. It
is the price printed on the share certificate.
Market Price: It is the price at which the share can be brought or sold on the
stock/share market.
Par Value of Shares: When the shares are issued at its face value, it is called par
value, it is called par value of share.
Above Par: If the market value of the share is more than the face value, it is said to
be above par or at premium.
Below Par: If the market value of share is less than the face value, it is said to be
below par or it is said to be at discount.
Dividend: It is the portion of the profit of the company which is distributed to the
share holders. The dividend is always calculated on the face value of the share.
Dividends may be cash dividends or share dividends. Bonus shares are known as
stock dividends.
Ex-Dividend and Cum-dividend Prices: Interest on bond is payable on pre-
determined dates. If the bond is bought or sold on a date closer to the interest due
date, the prices may be quoted Ex-interest or Cum-interest. If the price is ex-
interest the selling price of it is not inclusive of interest. If it is quoted cum interest,
the buyers will receive the interest amount. In the case of shares, share dividends
are paid instead of interest. Cum dividend price quotations are usually higher than
the Ex-dividend quotations.
Yield: Actual dividend received by the actual amount invested in a stock or shares
called yield.
Dividend
i.e, Yield 
Amount invested
Normal interest

Amount invested
Brokers and Brokerage: Buying and selling of stocks or shares is done through the
person called ‘brokers’ at stock exchange. They charge certain amount called
brokerage. Note that when stock/share is purchased, brokerage is added to the cost
price and when stock or share is sold, brokerage is subtracted from the selling price.
Kinds of Shares: A company may issue two kinds of shares. They are
(i) Preference shares (ii) Equity shares
(i) Preference shares: A preference share holder enjoys a preferential claim with
regard to the payments of dividend and repayment of capital. The rate of dividend
is fixed, but it is paid before profit is distributed to other members.
(ii) Equity shares : An equity share holder has no especial rights. The rate of
dividend is not fixed. It varies from year to year. An equity share holder is paid
dividend only after the claims of preference share holders are satisfied.
Quotation
Consider the statement “Government paper mills 11% shares at 110”. This is
quotation. This means a share of the mill having face value Rs.100 is available for
sale at Rs.110. This share fetches him a dividend of Rs.11 every year.

Worked Examples
1. Find the cost of 80 shares at 5% if the market value of the share is 93 and its par-
value is Rs.100. If a person invests Rs.37200 is such shares them find his annual
income.
Solution: Cost of 1 share = Rs.93.
Cost of 80 such shares = 80 × 93 = Rs.7440
Now, the person has invested Rs.37,200.
By investing Rs.93, the person gets 1 share.
 By investing Rs.37200 the person gets
37200  1
  400
93
 The person possesses 400 shares.
Face value of 1 share = Rs.100
Face value of 400 shares = 400 × Rs.100 = Rs.40000
Annual income = 5% of face value of shares
5
  40,000
100
=Rs.2, 000

2. Find the yield by investing Rs.1140 on 15% stack quoted at Rs.95.

Solution:
For Rs.100 stock, Rs.95 is the amount invested and Rs.15 is the normal interest.
15
 Yield   0.1578  0.16
95
By investing Rs.95, 1 stock is obtained
1140  1
By investing Rs.1140,  12 stocks are obtained.
95
1 stock has face value 100/-
12 stock has face value 1200/-
Nominal interest = 15% of Face value of stock
= 15% of 1200
15
=  1200  180
100
Nominal interest 180
Yield = 
Amount invested 1140
= 0.1578
 0.16
3. Pusphak buys Rs.2,000 shares paying 9% dividend. If he wants to have an
interest of 12% on his money he must invest in order to get equal dividends
from both.
96
Solution : For an income of Re 1 in 3% stock at 96, investment = Rs.  Rs.32.
3
120
For an income of Re 1 in 4% stock at 120 investment = Rs. .
4
 Ratio of investments = 32:30.
= 16:15

5.7 Terminal Questions:

1. Find the cost of
3
(a) Rs.8750 8 % stock at 92.
4
1
(b) Rs.8500, 9 % stock at 6 premiums.
2
(c) Rs.7200, 10% stock at 7 discounts.
(d) Rs. 6400, 8% stock at par (brokerage 1/8%)
1
2. Find the cash required to purchase Rs.1600, 8 % stock at 105 (brokerage ½%)
2
1
3. Find the cash realized by selling Rs.2400, 5 % stock at 5 premiums, brokerage
2
being ¼%.
4. Which of the following is better investment? 6% at 94 or 8% at 110.
5. Ramu possesses 150 shares of Rs.25 each; the dividend declared by the
company is 12%. What is the dividend earned by him? If he sells the shares at
Rs.40 and reinvest the proceeds in 7% shares of par value Rs.100 at Rs.100 at
Rs.80, Find the change in his dividend income.
6. A man invested Rs.6750 partly in 6% stock at 140 and partly in 5% stock at 125.
Find his investment in cash if the income derived from both the investments is
Rs.280..
7. Mr.Vivek invested Rs.2200 partly in 10% stock at 120 and partly in 12% stock at
96. Find his investment in each if the income derived from both the investments
is Rs.200.
8. A man invests some money partly in 6% stock at 96 and partly in 5% stock at
120. In what ratio, he must invest the money so as to get equal dividends from
both.
9. Rs.2780 is invested partly in 4% stock at 75 and 5% stock at 80. If the incomes
from both investments are equal, find the investments in 5% stock.
10.Mr. Harish has invested a certain amount of money in 13% stock at 101. He sold
it when market value went down to 96.5. He lost Rs.3564 on this process. If he
1
has paid the brokerage at 1 % for all transactions, what was the amount of cash
2
investment? What was the stock value of the investment in first instance?
11.Which of the following is better investment? 5½% stock at 102 or 4 and ¾ stock
at 106.
12.Find the cash required to purchase Rs.20,000 stock at 105 (brokerage 1/2 %).
1
Also the annual dividend received if the company declares dividend of 8 %.
2
13.A person has invested a certain sum of money in 13% stock at 96. He sold the
investment when the market value when the market value went up to 101.5. He
gained Rs.1470 in this process. If he has paid the brokerage at 2% for all the
transaction, what was the amount of cash investment and what was the stock
value of the investment in the first instance.
 1
14.Vivek has Rs.16, 500 stocks in 3%. He sells it out at 101 and invests the proceeds
8
7
in 4% railway debentures at 131 . Find the change in his income, a brokerage of
8
1
% being charged on each transaction.
8
15.Tulasi has invested Rs.1,00,000 partly in 12% stock at 120 and partly in 15%
stock a 75. If the total income form both is Rs.15,000. Find the amount invested
in 2 types of stocks.
16.Mr. Gauriprasad sold Rs.2250 stock at 75 and bought stock at 88.50 with
proceeds. How much stock worth does he buy if the brokerage is 2% for selling
and 1.5% for buying.

Answers
1. (a) Rs.8050 (b) Rs.9010 (c) Rs.6696 (d) Rs.6408.
2. Rs.1688
3. Rs.2514
4. 8% at 110
5. Rs.75
6. Rs.3500 and Rs.3250
7. RS.1800 and Rs.400
8. 2 : 3
9. Rs.1280
10.Rs.73, 062 and Rs.72338.60.
MODULE -4

Measures of Dispersion:

A measure of central tendency summarizes the distribution of a variable into single

figure which can be regarded as its representative. This measure alone, however, is
not sufficient to describe a distribution because there may be a situation where two
or more distribution have the same central value. Conversely, it is possible that the
pattern of distribution in two or more situations is same but the value of their
central tendency is different. Hence, it is necessary to define some additional
summary measures to adequately represent the characteristics of a distribution.
One such measure is known as the measure of dispersion or the measure of
variation.

Definition
The concept of dispersion is related to the extent of scatter or variability in
observations. The variability, in an observation, is often measured as its deviation
from a central value. A suitable average of all such deviation is called the measure
of dispersion. Since most of the measures of dispersion are based on the average
of deviations of observations from an average, they are also known as the average
of second order. As opposed to this, the measures of central tendency are known
as the averages of first order. Some important definitions of dispersion are given
below:-

(i) “Dispersion is the measure of variation of the items.”

- A.L.Bowley
(ii) “Dispersion is the measure of extent to which individual items vary.”
- L.R.Connor
(iii) “The degree to which numerical data tend to spread about an average
value is called variation or dispersion of the data.”
- Spiegel
(iv) “The measure of the scatteredness of the mass of figures in a series about
an average is called the measure of variation or dispersion.”
- Simpson and Kafka

Objectives of measuring Dispersion

The main objectives of measuring dispersion of a distribution are :
1. To test reliability of an average
A measure of dispersion can be used to test the reliability of an average. A low
value of dispersion implies that there is greater degree of homogeneity among
various items and, consequently, their average can be taken as more reliable or
representative of the distribution.
2. To compare the extent of variability in two or more distributions
 The extent of variability in two or more distributions can be compared by
computing their respective dispersions. A distribution having lower value of
dispersion is said to be more uniform or consistent.
3. To facilitate the computations of other statistical measures
Measures of dispersions are used in computations of various important
statistical measures like correlation, regression, test statistics, confidence
intervals, control limits, etc.
4. To serve as the basis for control of variations
The main objective of computing a measure of dispersion is to known whether
the given observations are uniform or not. This knowledge may be utilized in
many ways. In the words of Spurr and Bonini, “In matters of health, variations in
body temperature, pulse beat and blood pressure is basic guides to diagnosis.
Prescribed treatment is designed to control their variations. In industrial
production, efficient operation requires control of quality variations, the causes
of which are sought through inspection and quality control programs.” The
extent of inequalities of income and wealth in any society may help in the
selection of an appropriate policy to control their variations.

Characteristics of a good Measure of Dispersion

Like the characteristics of a measure of central tendency, a good measure of
dispersion should possess the following characteristics.
(i) It should be easy to calculate.
(ii) It should be easy to understand.
(iii) It should be rigidly defined.
(iv) It should be based on all the observations.
(v) It should be capable of further mathematical treatment.
(vi) It should not be unduly affected by extreme observations.
(vii) It should not be much affected by the fluctuations of sampling.

Various measures of dispersion

The following are some important measures of dispersion:

(i) Range
(ii) Inter-Quartile Range
(iii) Mean Deviation
(iv) Standard Deviation

5.20 RANGE:

The range of a distribution is the difference between its two extreme observations,
i.e., the difference between the largest and smallest observations. Symbolically, R =
L – S where R denotes range, L and S denote largest and smallest observations,
respectively. R is the absolute measure of range. A relative measure of range, also
termed as coefficient of range is defined as :
LS
Coefficient of Range =
LS
Merits and Demerits of Range

Merits Demerits

1. It is easy to understand and easy 1. It is not based on all the

to calculate. observations.
2. It gives a quick measure of 2. It is very much affected by
variability. extreme observations.
3. It only gives rough idea of spread
of observations.
4. It does not give any idea about
the pattern of the distribution.
There can be two distributions
with the same range and
different patterns of distribution.
5. It is very much affected by
fluctuations of sampling.
6. It is not capable of being treated
mathematically.
7. It cannot be calculated for a
distribution with open ends.

Uses of Range
In spite of many serious demerits, it is useful in the following situations:
1. It is used in the preparation of control charts for controlling the quality of
manufactured items.
2. It is also used in the study of fluctuations of, say, price of a commodity,
temperature of a patient, amount of rainfall in a given period, etc.

Inter-Quartile Range
Interquartile Range is an absolute measure of dispersion given by the difference
between third quartile (Q3) and first quartile (Q1).

Symbolically, Interquartile range = Q3 – Q1.

The range of a distribution is not a satisfactory measure, particularly, when it

contains extreme values. The presence of a very high and a very low observation
unduly increases the range of distribution. To avoid this difficulty, interquartile
range is used as measure of dispersion. Interquartile range is the range of middle
50% of observations. If the observations of a distribution are more densely
concentrated around median, interquartile range will be less than half of the range.
Further, if they do not have any concentration around median then corresponding
interquartile range will be wide and will tend to be equal to half of the range.

Inter-Percentile Range
The difficulty of extreme observations can be tackled by the use of interpercentile
range or simply percentile range.
Symbolically, Interpercentile range = P(100 – i) – Pi , ( i < 50).

This measure excludes i% of the observations at each end of the distribution and is
a range of the middle (100 – 2i)% of the observations.

Normally, a percentile range correspond-ing to i = 10, i.e., P90 – P10 is used. Since Q1
= P25 and Q3 = P75, therefore, interquartile range is also a percentile range.

5.21 Quartile Deviation (or) Semi Interquartile Range:

Half of the interquartile range is called the quartile deviation or semi-interquartile

range.

Q3  Q1
Symbolically, Q.D. =
2

The value of Q.D. gives the average magnitude by which the two quartiles deviate
from median.

If the distribution is approximately symmetrical, then Md  Q.D. will include about

50% of the observations and, thus, we can write Q1 = Md + Q.D.

Further, a low value of Q.D. indicates a high concentration of central 50%

observations and vice-versa.

Quartile Deviation is an absolute measure of dispersion. The corresponding relative

measure is known as coefficient of quartile deviation defined as :

Q3  Q1
2 Q  Q1
Coefficient of Q.D. =  3
Q3  Q1 Q3  Q1
2
Analogous to quartile deviation and the coefficient of quartile deviation we can also
P100i  Pi
define a percentile deviation and coefficient of percentile deviation as and
2
P100i  Pi
P100i  Pi
Merits and Demerits of Quartile Deviation

Merits
1. It is rigidly defined.
2. It is easy to understand and easy
to compute.
3. It is not affected by extreme
observations and hence, a
suitable measure of dispersion
when a distribution is highly
skewed.
Demerits
1. Since it is not based on all
observations, hence not a
reliable measure of dispersion.
2. It is very much affected by the
fluctuations of sampling.
3. It is not capable of being treated
mathematically.

5.22 Mean Deviation (or) Average Deviation:

An important requirement of a measure of dispersion is that it should be based on

all the observations. The measures of dispersion discussed so far do not satisfy
this requirement. Mean deviation is a measure of dispersion based on all the
observations. It is defined as the arithmetic mean of the absolute deviations of
observations from a central value like mean, median or mode. Here the dispersion
in each observation is measured by its deviation from a central value. This
deviation will be positive for an observation greater than the central value and
negative for less than it. If these deviations are added as such, the positive
deviations tend to cancel the negative deviations and the resulting sum will not
reflect a correct magnitude of the total spread of observations. This difficulty is
tackled by taking the absolute value of the deviations.
The following are the formulae for the computation of mean deviation (M.D.) of an
individual series of observations X1, X2,….Xn :
1 n
(i) M.D. from Mean M.D. from X =  Xi  X
n i 1
1 n
(ii) M.D. from Median M.D. from Md =  Xi  Md
n i 1
1 n
(iii) M.D. from Mode M.D. from Mo =  X i  Mo
n i 1

In case of an ungrouped frequency distribution, the observations X1, X2,….Xn occur

with respective frequencies f1, f2, …. Fn such that  fi = N. The corresponding
formulae for M.D. can be written as :
 1 n
(i) M.D. from Mean M.D. from X =  fi X i  X
n i 1
1 n
(ii) M.D. from Median M.D. from Md =  fi X i  M d
n i 1
1 n
(iii) M.D. from Mode M.D. from Mo =  f i X i  Mo
n i 1

The above formulae are also applicable to a grouped frequency distribution where
the symbols X1, X2,….Xn will denote the mid-values of the first, second ….. nth classes
respectively.

Coefficient of Mean Deviation

The above formulae for mean deviation give an absolute measure of dispersion.
The formulae for relative measure, termed as the coefficient of mean deviation,
are given below:
M .D. from X
(i) Coefficient of M.D. from Mean =
X
M .D. from M d
(ii) Coefficient of M.D. from Median =
Md
M .D. from M o
(iii) Coefficient of M.D. from Mode =
Mo

Merits and Demerits of Mean Deviation

Merits
1. It is easy to understand and easy 1. It is not capable of being treated
to compute.
2. It is based on all observations.
3. It is less affected by extreme
observations vis-à-vis range or
standard deviation.
4. It is not much affected by
fluctuations of sampling.
Demerits
mathematically. Since mean
deviation is the arithmetic mean
of absolute values of deviations,
it is not very convenient to be
algebraically manipulated. This
necessitates a search for a
measure of dispersion which is
capable of being subjected to
further mathematical treatment.
2. It is not well defined measure of
 dispersion since deviations can
be taken from any measure of
central tendency.

Uses of Mean Deviation

The mean deviation is a very useful measure of dispersion when sample size is
small and no elaborate analysis of data is needed. Since standard deviation gives
more importance to extreme observations the use of mean deviation is preferred
in statistical analysis of certain economic, business and social phenomena.

Example: Find mean deviation about mean for the following data: 20, 15, 19, 24,
16, 14

X X X |X X | X 
108
 18
20 2 2 Mean = N 6

15 3 3
19 1 1
1 n
24 6 6
 fi X i  X
16 2 2 M.D. from X = n i 1
14 4 4
108 18 18
3
= 6

Example:
Find mean deviation about mean, median and mode for the following data:
Also find coefficient of mean deviation with respect to mean, median and mode.

Height in
50-53 53-56 56-59 59-62 62-65 65-68
inches
No.of students 2 7 24 27 13 3
Solution:
Calculation of Mean, Median and Mode:

Height in No.of x  57.5

Mid X d f.d l.c.f.
inches students 3
50-53 2 51.5 2 4 2
53-56 7 54.5 1 7 9
56-59 24 57.5 0 0 33
59-62 27 60.5 1 27 60
62-65 13 63.5 2 26 73
65-68 3 66.5 3 9 76
76 51

 f .d ' 51
Mean = X  A   h = 57.5   3 = 59.51
N 76
  fi   76 
 2  C  2  33 
Median = Md  L     h = 59    3 = 59.56
 fm   27 
   
 f1  f o   27  24 
Mode = M o  L     h = 59   2  27  24  13  3 = 59.53
 2 f1   f 0  f 2   

Calculation of Mean Deviation:

|X X f . | X  | X  X f.|X X | X  X f.|X X

f Mid X
| X| Med| Med| Mo| Mo|
2 51.5 8.01 16.02 8.06 16.12 8.03 16.06
7 54.5 5.01 35.07 5.06 35.42 5.03 35.21
24 57.5 2.01 48.24 2.06 49.44 2.03 48.72
27 60.5 0.99 26.73 0.94 25.38 0.97 26.19
13 63.5 3.99 51.87 3.94 51.22 3.97 51.61
3 66.5 6.99 20.97 6.94 20.82 6.97 20.91
76 198.9 198.4 198.7

1 n

198.9
M.D. from Mean M.D. from X = fi X i  X = = 2.6171
n i 1 76
1 n
=  fi X i  M d =
198.4
M.D. from Median M.D. from Md = 2.6105
n i 1 76
 1 n

198.7
M.D. from Mode M.D. from Mo = f i X i  Mo = = 2.6144
n i 1 76

M .D. from X 2.6171

Coefficient of M.D. from Mean = 100 = 100 = 4.39
X 59.51
M .D. from M d 2.6105
Coefficient of M.D. from Median = 100 = 100 = 4.89
Md 59.56
M .D. from M o 2.6144
Coefficient of M.D. from Mode = 100 = 100 = 4.39
Mo 59.53

5.23 Standard Deviation:

From the mathematical point of view, the practice of ignoring minus sign of the
deviations, while computing mean deviation, is very inconvenient and this makes
the formula, for mean deviation, unsuitable for further mathematical treatment.
Further, if the signs are taken into account, the sum of deviations taken from their
arithmetic mean is zero. This would mean that there is no dispersion in the
observation. However, the fact remains that various observations are different
from each other. In order to escape this problem, the squares of the deviations
from arithmetic mean are taken and the positive square root of arithmetic mean of
sum of squares of these deviations is taken as a measure of dispersion. This
measure of dispersion is known as standard deviation or root-mean square
deviation. Square of standard deviation is known as variance. The concept of
standard deviation was introduced by Karl Pearson in 1893.

The standard deviation is denoted by Greek letter ‘’which is called sigma.

 X 
N 2
1
  i X , for n individual observations, X1, X2,….Xn
N i 1

 
2
1 N
   fi X i  X
N i 1
, for a grouped or ungrouped frequency distribution

or where an observation Xi occurs with frequency fi for i = 1,2,….n and  fi = N.

We can also write

 2
 n 
n 2   fi X i 
  i 1 
fi X i
 
2

i 1 N  N 
 
 
2
 n 
n 2   fi X i 
  i 1 
fi X i
  
i 1 N  N 
 
 
It should be noted here that the units of  are same as the units of X .

Calculation of Standard Deviation

There are two methods of calculating standard deviation:

(i) Direct Method (ii) Short-cut Method
If there are n observations X1, X2,….Xn, v
(i) Direct Method
(a) Individual Series

Various steps in the calculation of standard deviation are :

1 n
(i) Find X   Xi
n i 1
(ii) Obtain deviations X i  X  for each i = 1,2,….n

 X 
n
1 2
(iii) Square these deviations and add to obtain i X
n i 1

 
N 2
1
(iv) Compute variance, i.e.,  2   Xi  X
n i 1
(v) Obtain  as the positive square root of 2.

Note: Standard deviation is not affected by change origin, but affected by change
of scale.

Example:
A population consists of four observations: {1, 3, 5, 7}. What is the variance and
standard deviation?

Solution:
First, we need to compute the population mean.
X 
1  3  5  7  4
4

Then we plug all of the known values into formula for the variance of a population,
as shown below:
 
2
1 N
 2  Xi  X
n i 1
2
1

 (1  4) 2  (3  4) 2  (5  4) 2  (7  4) 2
4

2
1

 (3) 2  (1) 2  (1) 2  (3) 2
4

 (9  1  1 9
1
2
4
2  5 ;   5  2.236

Example:
Calculate standard deviation of the following data:

X: 10 11 12 13 14 15 16 17 18
f: 2 7 10 12 15 11 10 6 3

Solution:
Calculation of standard deviation:
Let d  X  X
X f f.X d  X 14 d2 f . d2 f . X2
10 2 20 -4 16 32 200
11 7 77 -3 9 63 847
12 10 120 -2 4 40 1440
13 12 156 -1 1 12 2028
14 15 210 0 0 0 2940
15 11 165 1 1 11 2475
16 10 160 2 4 40 2560
17 6 102 3 9 54 1734
18 3 54 4 16 48 972
Total 76 1064 300 15196

1064
X   14
76
 
2
1 N
 2   Xi  X
n i 1
2
1 N
2    X i  14  =  2  300 = 3.95
76 i 1 76
  1.99

Alternative Method :

2
 n 
n 2   fi X i 
  i 1 
fi X i
2  i 1 N  N 
 
 
2
n
15196  1064 
  
2
  = = 1.99
i 1 76  76 

(ii) Short-cut Method

The short-cut formula for variance of X is given by :

2
 n 
n 2   fi di 
  i 1  , where di = Xi – A
fi di
  2

i 1 N  N 
 
 

2
 n 
  fi di 
  h 2 , where d  X i  A ,
n 2

  i 1
fi di
  2

i 1 N  N  i
h
 
 
 h is the height of the class interval.

2
 n 
n 2   fi di 
  i 1  h
fi di
  
i 1 N  N 
 
 

Example:
Calculate standard deviation of the following series:

Weekly wages No.of workers

100-105 200
105-110 210
110-115 230
115-120 320
120-125 350
125-130 520
130-135 410
135-140 320
140-145 280
145-150 210
150-155 160
155-160 90

Solution:

Calculation of standard deviation by short-cut method :

Mid-
X f d d2 f.d f . d2
Values
100-
200 102.5 -5 25 -1000 5000
105
105-
210 107.5 -4 16 -840 3360
110
110-
230 112.5 -3 9 -690 2070
115
115- 320 117.5 -2 4 -640 1280
120
120-
350 122.5 -1 1 -350 350
125
125-
520 127.5 0 0 0 0
130
130-
410 132.5 1 1 410 410
135
135-
320 137.5 2 4 640 1280
140
140-
280 142.5 3 9 840 2520
145
145-
210 147.5 4 16 840 3360
150
150-
160 152.5 5 25 800 4000
155
155-
90 157.5 6 36 540 3240
160
Total 3300 550 26870

2
 n 
n 2   fi di 
  i 1  h
fi di
  
i 1 N  N 
 
 

26870 550
    5 = 14.24
3300 3300

Example:
Find mean and standard deviation of the following distribution :

Age (in years) No.of

Persons
Less than 20 0
Less than 25 170
Less than 30 280
Less than 35 360
Less than 40 405
Less than 45 445
Less than 50 480

Solution:
Calculation of Mean and Standard deviation :

Class No.of Persons Mid-Values x  32.5

d d2 fd f  d2
Interval (f) (x) 5
20-25 170 22.5 -2 4 -340 680.0
25-30 110 27.5 -1 1 -110 110.0
30-35 80 32.5 0 0 0 0.0
35-40 45 37.5 1 1 45 45.0
40-45 40 42.5 2 4 80 160.0
45-50 35 47.5 3 9 105 315.0
-
Total 480 3 19.0 1310.0
220.0

 f .d '
Mean = X  A  h
N
220
= 32.5  5
480
= 30.21

2
 n 
n 2   fi di 
  i 1  h
fi di
  
i 1 N  N 
 
 

1310   220  2
    5
480  480 

  1.59  5 = 7.95

Health issues are a concern of managers, especially as they evaluate the cost of
medical insurance. A recent survey of 150 executives of Elvers Industries, a large
insurance and financial firm located in the Southwest, reported the number of
pounds by which the executives were overweight. Compute the mean, mode and
standard deviation.

Pounds 12 upto 18 upto 24 upto

0 upto 6 6 upto 12
Overweight 18 24 30
Frequency 14 42 58 28 8

Pounds Frequency Mid X x  15

d= fd fd2
Overweight (X) (f) (x) 6
0 upto 6 14 3 -2 -28 56
6 upto 12 42 9 -1 -42 42
12 upto 18 58 15 0 0 0 Modal class

18 upto 24 28 21 1 28 28
24 upto 30 8 27 2 16 32
TOTAL 150 -26 158

n
1 1
Mean   A   fx  h = 15  (26)  6 = 13.96
f i 1 150

  fd 
2
158   26 
2
1
SD () =
N
 fd   N   h =
2

150  150 
  6 = 6.07
 
f1  f 0
Mode = L  h
2 f1  ( f 0  f 2 )
whereL = Lower limit of the modal class; f1 = Frequency of the modal
class;
f0 = Frequency of the class preceding the modal class
f2 = Frequency of the class succeeding the modal class

58  42
Mode = 12   6 = 14.09
2  58  (42  28)

5.25 Merits, Demerits and Uses of Standard Deviation:

Merits
1. It is rigidly defined measure of dispersion.
2. It is based on all the observations.
3. It is capable of being treated mathematically. For example, if standard
deviations of a number of groups are known, their combined standard
deviation can be computed.
4. It is not very much affected by the fluctuations of sampling and, therefore, is
widely used in sampling theory and test of significance.

Demerits
1. As compared to the quartile deviation and range, etc., it is difficult to
understand and difficult to calculate.
2. it gives more importance to extreme observations.
3. Since it depends upon the units of measurement of the observations, it cannot
be used to compare the dispersions of the distributions expressed in different
units.

Uses of standard deviation

1. Standard deviation can be used to compare the dispersions of two or more
distributions when their units of measurements and arithmetic means are
same.
2. It is used to test the reliability of mean. It may be pointed out here that the
mean of a distribution with least standard deviation is said to be more reliable.

5.26 Coefficient of Variation (Relative Measure):

The standard deviation is an absolute measure of dispersion and is expressed in

the same units as the units of variable X. A relative measure of dispersion, based
on standard deviation is known as coefficient of standard deviation and is given by


 100
X
This measure is used to compare the variability or homogeneity or stability or
uniformity or consistency of two or more sets of data. The data having a higher
value of the coefficient of variation is said to be more dispersed or less uniform,
etc.
Example:
Which of the following two series is more consistent?

Series A 192 288 236 229 184 260 384 291 330 243
Series B 83 87 93 109 124 126 101 102 108

Solution:

XA d=X-260 d2 XB d=XB-101 d2
192 -68 4624 83 -18 324
288 28 784 87 -14 196
236 -24 576 93 -8 64
229 -31 961 109 8 64
184 -76 5776 124 23 529
260 0 0 126 25 625
384 124 15376 101 0 0
291 31 961 102 1 1
330 70 4900 108 7 49
243 -17 289 0
37 34247 24 1852

37 24
X A  260   263.7 X B  101   103.67
10 9

2 2
34247  37  1852  24 
S.D.A =   = 58.4 S.D.B =   = 14.09
10  10  9  9 
To compare the variability of the two series, we compute their coefficient of
variation.
58.4 14.09
CVA =  100  22.15 CVA =  100  13.59
263.7 103.67
Since CVB is less than CVA, there is less variability in the observation of series B.
Hence Series B is more consistent than A.

5.27 Terminal Questions:

1. The monthly income of ten families (in rupees) in a certain locality are given
below.

Family A B C D E F G
Income (in 30 70 60 100 200 150 300
rupees)

Calculate the arithmetic average by (a)Direct method and (b)Short-cut

method

2. Calculate the mean for the data

X: 5 8 12 15 20 24
f: 3 4 6 5 3 2

3. The following table gives the distribution of the number of workers according
to the weekly wage in a company. Obtain the mean weekly wage.

Weekly wage (in

0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80
Rs.100’s)
Numbers of
5 10 15 18 7 8 5 3
workers

4. Mean of 20 values is 45. If one of these values is to be taken 64 instead of 46,

find the corrected mean.

5. From the following data, find the missing frequency when mean is 15.38.
Size (in inches) 10 12 14 16 18 20
Frequency 3 7 __ 20 8 5

6. The following table gives the weekly wages in rupees of workers in a certain
commercial organization. The frequency of the class-interval 49-52 is missing.

Weekly wages (in

40-43 43-46 46-49 49-52 52-55
Rs.)
Number of workers 31 58 60 __ 27
 It is known that the mean of the above frequency distribution is Rs .47.2. Find
the missing frequency.

7. Average monthly production of a certain factory for the first 9 months is 2584,
and for remaining three months it is 2416 units. Calculate average monthly
production for the year.

8. The marks of a student in written and oral tests in subjects A, B and C are as
follows. The written test marks are out of 75 and the oral test marks are out
of 25. Find the weighted mean of the marks in written test taking the marks in
oral test as weight. The marks of written test and oral test respectively as
follows: 27, 24, 43 and 5, 10, 15.
9. The monthly income of 8 families is given below. Find GM.
Family : A B C D E F G H
Income(Rs) 70 10 500 75 8 250 8 42

10. The following table gives the diameters of screws obtained in a sample
inquiry. Calculate the mean diameter using geometric average.

Diameter(m.m) 130 135 140 145 146 148 149 150 157
No. of Screws 3 4 6 6 3 5 2 1 1

11. An investor buys Rs.1, 200 worth of shares in a company each month. During
the first 5 months he bought the shares at a price of Rs.10, Rs.12, Rs.15, Rs.20
and Rs.24 per share. After 5 months what is the average price paid for the
shares by him.

12. Determine median from the following data 25, 20, 15, 45, 18, 7, 10, 38, 12.

13. Find median of the following data.

Wages (in Rs.) 60-70 50-60 40-50 30-40 20-30
Number of 7 21 11 6 5
workers

14. The table below gives the relative frequency distribution of annual pay roll for
100 small retail establishments in a city.
 Annual pay roll(1000 rupees) Establishments
Less than 10 8
10 and Less than 20 12
20 and Less than 30 18
30 and Less than 40 30
40 and Less than 50 20
50 and Less than 60 12
Total 100

Calculate Median pay.

15. Calculate the median from the data given below.

Wages (in Rs ) Number of
workers
Above 30 520
Above 40 470
Above 50 399
Above 60 210
Above 70 105
Above 80 45
Above 90 7

16. Calculate mode from the following data

Income (Rs) 10-20 20-30 30-40 40-50 50-60 60-70 70-80

No.of Persons 24 42 56 66 108 130 154

17. Compute quartile deviation from the following data :

Size 4-8 8-12 12- 16- 20- 24- 28- 32- 36-
16 20 24 28 32 36 40
Frequency: 6 10 18 30 15 12 10 6 2

18. Calculate mean deviation from median.

Age 15- 20- 25- 30- 35- 40- 45- 50-
20 25 30 35 40 45 50 55
No.of 9 16 12 26 14 12 6 5
People
19. Calculate the S.D. of the following data.
Size 6 7 8 9 10 11 12
Frequency 3 6 9 13 8 5 4

20. Calculate S.D from the following series.

Class interval 5-15 15-25 25-35 35-45 45-55
Frequency 8 12 15 9 6

21. Find out which of the following batsmen is more consistent in scoring.
Batsman 5 7 16 27 39 53 56 61 80 101 105
A
Batsman 0 4 16 21 41 43 57 78 83 93 95
B

22. Particulars regarding the income of two villages are given below. In which
village is the variation in income greater?

Village A VillageB
Number of people 600 500
Average income (in Rs) 175 186
Variance of income (in Rs) 100 81

23. From the following table calculate the standard deviation.

Daily Wages (in 150 200 250 300 350 400 450
Rs):
No.of People 3 25 19 16 4 5 6

24. Compute coefficient of quartile deviation from the following data:

Size 5-7 8-10 11-13 14-16 17-19
Frequency 14 24 38 20 4

25. Calculate standard deviation from the following data:

Daily wages 70-90 90-110 110-130 130-150 150-170
No.of 8 11 18 9 4
workers
 MODULE – 5
ANALYSIS OF BI VARIATE DATA-I: CORRELATION ANALYSIS

Structure:
1.1 Meaning and Significance of Correlation
1.2 Types of correlation
1.3 Measures of correlation
1.4 Scatter Diagram
1.5 Karl Pearson’s coefficient of correlation
1.6 Probable error –concept, uses and interpretation
1.7 Spearman’s Rank Correlation Co-Efficient
1.8 Concurrent deviation method
1.9 Questions and Answers

Learning Objective
To understand
 Correlation – Types of Correlation
 Karl Pearson’s co efficient of correlation
 Spearman’s Rank co relation
 Probable error
 Concurrent deviation method.

1.1 Meaning and Significance of Correlation:

Sometimes we want to know the relationship between the variables instead of just
doing the comparison, which we have been doing so far with the help of central
tendency and dispersion. Whenever we think of bivariate or a multivariate
distribution, the idea of their relation come into our mind at once. These variables
may be ‘Price and Supply’, ‘Income and Saving’, ‘Income and Investment’ or
‘Income and Consumption’ etc. The relationship between two series when
measured quantitatively is known as Correlation. Due to this correlation, change in
the value of one series brings about a change in the value of the other series. This
change may be in the same or in the opposite direction; and magnitude of change
may not be the same. ‘Correlation is a Statistical Technique which shows the
relationship between two or more variables’.
Correlation is the associated variation between 2 or more variables or correlation
is an analysis of the co-variation between two or more variables.
Or
Two variables are said to be correlated if change in one variable affects the change
in the corresponding variable.

1.2 Types of correlation:

1. Positive correlation: - If the variables vary in the same direction, then they are
said to be positively correlated.
Example: -
1) Amount of rainfall (x); yield of crops (y)
2) Price of an Item (x); supply (y)
Price (Rs.) 30 35 40 45
Supply ( Kgs.) 90 110 130 150

2. Negative correlation: - If the variables deviate in opposite directions, then they

are said to be negatively correlated.
Example: -
i) Pressure (x) and volume (y) of gas.
ii) Price (x) and demand (y).
Price (Rs.) 30 35 40 45
Demand ( 90 70 50 30
Kgs.)

3. Perfect Correlation. If the amount of change in one variable is at a constant

ratio to the change in the other variable, the correlation is Perfect.
Example:

Price (in Rs) 20 21 22 23

Quantity Supplied (in Kgs.) 100 200 300 400

4. Non-Correlation: - If there is no associated variation between the two

variables, the variables are said to be non-correlated or uncorrelated.
Example: -
1) Temperature and money circulation
1.3 Measures of correlation:

The degree of relationship between the two variables can be measured using the
following methods
a) Scatter diagram.
b) Karl – Pearson’s coefficient of correlation.
c) Spearman’s Rank correlation coefficient.
d.) Con-current deviation method

1.4 Scatter Diagram:

It is graphical presentation of bi-variate data. Here one variable (x) is taken along
the x axis and the other variable (y) is taken along the y axis and each pair of (x, y)
values are represented by a point of the graph.

1.5 Karl Pearson’s coefficient of correlation:

The degree of variation between two variables is given by Karl – Pearson’s

coefficient of correlation. It is denoted by ‘r’ or ‘rxy’ and is given by
cov ( x , y) cov(x , y) cov(x, y )
r = =
v(x) V( y) S.D(x)  S.D( y)  x.  y

1
( x  x ) ( y  y )
= n
1 2  1 2
 n  ( x  x)   n ( y  y) 
[ n  x y -  x  y]

(n  x 2  ( x ) 2).(n  y 2  ( y )2 )

= [∑ ( x  x ) ( y  y )] /  ( x - x ) 2 ( y - y ) 2
Or
N  dxdy   dx dy
r
Nd x 2
 ( d x) 2  N  d y 2  ( d y ) 2 
 r  dxdy
 dx . dy
2 2
.

PROBLEMS ON KARL PEARSON’S CORRELATION COEFFICIENT

1. Calculate Karl Pearson’s co-efficient of correlation from the following data:

X 7 9 13 16 19 21 25 34
Y 11 13 16 16 19 26 23 36

Solution:
X- X dx2 Y= Y dy2 dxdy
 x  x  y  y 
X
dx x  x  2 Y
Dy y y 2

7 -11 121 11 -9 81 99
9 -9 81 13 -7 49 63
13 -5 25 16 -4 16 20
16 -2 4 16 -4 16 8
19 +1 1 19 -1 1 -1
21 +3 9 26 +6 36 18
25 +7 49 23 +3 9 21
34 +16 256 36 +16 256 256
∑X = 144 +27 ∑ x2= 546 ∑ Y = 160 = +25 ∑ y2 = 464 = +485
-27 - 25 -1
=0 =0 = 484
X
X 
144
 18 and Y 
 Y  160 = 20
N 8 N 8
1
 dxdy
The formula for correlation is, r = n
1 2 1 2
 n  dx   n  dy 
Substituting the values from the above table in the formula, we get
484
r=
√546𝑋464
r = 0.9615

Therefore, there is a high degree of positive correlation between the variables.

2. From the following table, find correlation co-efficient between age and playing
habits of students.

AGE (YEARS) 15 16 17 18 19 20
NO. OF STUDENTS 250 200 150 120 100 80
REGULAR PLAYERS: 200 150 90 48 30 12

SOLUTION:

Given the Age is the variable ‘X’ and the other variable ‘Y’is the percentage of
regular players. It is calculated by the following formula
Re gularPlayers
Y 100
No.OfStudents
200 150 90
Y= 100  80 Y= 100  75 Y= 100  60
250 200 150
48 30 12
Y= 100  40 Y= 100  30 Y=  100  15
120 100 80

AGE X - 17 dx2 % of regular players

X dx
Y (Y – 50)/10 dy2 dxdy
dy
d
15 -2 4 80 +3.0 9.00 -6.0
16 -1 1 75 +2.50 6.25 -2.5
17 0 0 60 +1.00 1.00 0
18 +1 1 40 -1.00 1.00 -1.0
19 +2 4 30 -2.00 4.00 -4.0
20 +3 9 15 -3.50 12.25 -10.5
2
∑X = 105 +6 ∑ dx = 19 ∑ Y = 300 =+6.5 - 6.5= ∑d y2 =-
-3 0 =33.5 24.0
=3

X
X 
105
= 17.5
N 6
Y
Y 
300
= 50
N 6
The formula for correlation is
N  dxdy   dx dy
r
Nd x 2
 ( d x) 2  N  d y 2  ( d y ) 2 
6   24   3  0

 6 19  (3)  6  33.5  (0) 
2 2

144

105  201
144

21105

r = -0.9912194
Therefore, there is a high degree of negative correlation between the variables.

7. From the following data compute the co-efficient of r

X Y
X 14.6 12.7
Squares of deviations from 115.96 59.04
Sum mean of the products of
deviations of X
and Y series from their respective means =53.95. No. of pairs of
value = 10.

Solution:
r
 dxd y
 dx   dy
2 2

53.95

115 .96  59.04
53.95 53.95
 
6846 .2784 82.74224
= 0.652084

1.6 Probable error –concept, uses and interpretation:

Probable error:
It is defined as the difference while calculating correlation co-efficient for a sample
of observations instead of the entire population. It is given by
1  r 2 
PE = 0.6745  
 n 
r = co-efficient of correlation
n = Number of Observations
1. If r = 0.6 and N = 64, find out the probable error of the co-efficient of
correlation and determine the limits for population r.
1 r 2
Solution: P.E  0.6745 
n
1  (0.6)2
 0.6745 
64
1  0.36
 0.6745 
8
0.64
 0.6745 
8
0.43168

8
= 0.05396
Limits of population correlation coefficient r:
Lower limit of r = r  P.E.  0.6  0.05396
 0.54604
Upper limit of r = r  P.E.  0.6  0.05396
 0.65396

2. The correlation co-efficient is 0.64 and its P.E is 0.1372. What is the value of n?

1.7 Spearman’s Rank Correlation Co-Efficient:

When the data is quantitative we use Karl Pearson’s correlation coefficient. But if
the either qualitative or quantitative we use Spearman’s correlation coefficient.
Here we rank observations for both variables separately either in the ascending or
descending order of values taken by them. In case of repeated observations, we
assign the average ranks to these observations. Depending upon the data being
non-repeated or repeated values, we use the following formulae suggested by
Spearman, which is denoted by ‘’. Its limits are similar to ‘r’, which lies between ‘-
1’ and ’+1’.

SPEARMAN’S RANK CORRELATION CO-EFFICIENT WITHOUT TIES (NON-REPEATED

RANKS)


 6 d 2 
 = 1 


 n  n 
3

SPEARMAN’S RANK CORRELATION WHEN RANKS ARE REPEATED IN GIVEN


 6  d 2  CF 
 = 1 


 n3  n 
Here
d= R1 –R2
R1 = Ranks of the variable x
R2 = Ranks of the variable y
N = Number of pairs of observations of x and y
m1  m1 m2  m2 m3  m3
3 3 3
CF = Correction Factor =    .....
12 12 12

m1, m2, m3, … - Number of times the variables X and Y are repeated.
Here we assign the average rank to the repeated variable values.

PROBLEMS ON SPEARMAN’S RANK CORRELATION

Calculation of rank correlation – When ranks are not repeated

1. Calculate the rank correlation co-efficient for the following data:

X 60 34 40 50 45 41 22 43 42 66 64 46
Y 75 32 35 40 45 33 12 30 36 72 41 57

SOLUTION:
 X R1 Y R2 ( R1 - R2 )2= D 2
60 3 75 1 4
34 11 32 10 1
40 10 35 8 4
50 4 40 6 4
45 6 45 4 4
41 9 33 9 0
22 12 12 12 0
43 7 30 11 16
42 8 36 7 1
66 1 72 2 1
64 2 41 5 9
46 5 57 3 4
∑ D = 48
2

The Spearman’s Rank Correlation is

6 D 2
rk  1 
N3  N
6  48
1 3
12  12
288
1
1728  12
288
1
1716

 1  0.1678321

r = 0.8321679

There is high positive correlation between X and Y.

2. From the following data calculate the co-efficient of rank correlation between X
& Y.

X 36 56 20 65 42 33 44 50 15 60
Y 50 35 70 25 58 75 60 45 80 38
3. Ten competitors in a beauty pageant are ranked by three judges in the following
order:
1st Judge 1 5 4 8 9 6 10 7 3 2
nd
2 Judge 4 8 7 6 5 9 10 3 2 1
rd
3 Judge 6 7 8 1 5 10 9 2 3 4

Use rank correlation co-efficient to discuss which pair of judges have the nearest
approach to common tasted in beauty.

SOLUTION:
Computation of rank correlation
Judge Judge Judge (R1- (R2- (R3-
st nd
1 R1 2 R2 3 R3 R2)2 D2
rd
R3)2 D2 R1)2 D2
1 4 6 9 4 25
5 8 7 9 1 4
4 7 8 9 1 16
8 6 1 4 25 49
9 5 5 16 0 16
6 9 10 9 1 16
10 10 9 0 1 1
7 3 2 16 1 25
3 2 3 1 1 0
2 1 4 1 9 4
2 ∑D2=4 ∑D2=1
∑D =74
4 56

rk between 1st& 2nd judge

6 D 2
rk  1 
N3  N
6  74
rk  1  3
10  10
444
rk  1 
1000  10
444
rk  1
990
rk  1 0.48484
rk  0.5515152
rk between 2nd&3rd judge
6 D 2
rk  1 
N3  N
6  44
rk  1  3
10  10
264
rk  1 
1000  10
264
rk  1
990
rk  1 0.2666666
rk  0.7333334

rk between 3rd & 1st judge

6 D 2
rk  1 
N3  N
6  156
rk  1  3
10  10
936
rk  1 
1000  10
936
rk  1
990
rk  1 0.9454545
rk  0.0545455

Since, rk is maximum between Judges 2nd& 3rd. . Therefore, they have the nearest
approach to common taste in beauty.

Calculation of rank correlation – When ranks are given

1. Two ladies were asked to rank 7 different types of lipsticks. The ranks given by
them are given below.
X 2 1 4 3 5 7 6
Y 1 3 2 4 5 6 7
Calculate Spearman’s rank correlation.

Solution
Calculation of Spearman’s rank correlation.
 X Y ( R1 - R2 ) 2
R1 R2 D2
2 1 1
1 3 4
4 2 4
3 4 1
5 5 0
7 6 1
6 7 1
∑ D = 12
2

6 D 2
rk  1 
N3  N
6  12
 1 3
7 7
72
 1
343  7
72
 1
336
= 1 – 0.2142857
= 0.7857143

2. Ten competitors in a “Urban Edge-Summer Fall 2001” fashion show are ranked
by 3 judges X, Y and Z in the following order:
JUDGE X 1 6 5 10 3 2 4 9 7 8
JUDGE Y 3 5 8 4 7 10 2 1 6 9
JUDGE Z 6 4 9 8 1 2 3 10 5 7

Use rank correlation to find out which pair of judges have the nearest approach
fashion design.
Solution:
Judge X Judge Y Judge Z ( R1 - R2 ) 2 ( R2  R3 ) 2 ( R3  R1 ) 2
R1 R2 R3 D12 2 D23 2 D31 2
1 3 6 4 9 25
6 5 4 1 1 4
5 8 9 9 1 16
10 4 8 36 16 4
3 7 1 16 36 4
 2 10 642 64 0
4 2 43 1 1
9 1 6410 81 1
7 6 15 1 4
8 9 17 4 1
∑ D12 ∑ D23 = 214
2 2
∑ D31 2 = 60
=200
Rank correlation Rank correlation Rank correlation
st nd nd rd
between 1 and 2 judge between 2 and 3 judge between
st rd
1 and 3 judge
6 D12 2 6 D 2 3 2 6 D31 2
rk  1  rk  1  rk  1 
N3  N N3  N N3  N
6  200 6  214 6  60
 1 3  1 3  1
10  10 10  10 10 3  10
1200 1284 360
 1  1  1
1000  10 1000  10 1000  10
1200 1284 360
1 1 1
990 990 990
= 1 – 1.2121212 = 1 – 1.2969696 = 1 – 0.36363
= −0.21212 = −0.29696 = 0.6363637

Judges 1st and 3rd have the nearest approach fashion design

Calculation of rank correlation – When ranks are repeated

1. Ten students obtained the following marks in statistics and accountancy. Find the
rank correlation coefficient

STUDENTS A B C D E F G H I J
STATISTICS 115 109 112 87 98 120 98 100 98 118
ACCOUNTANCY 75 73 85 70 76 82 65 73 68 80

Solution:
Ranks are not given while assigning ranks equal values should be awarded equal
ranks.
Statistics R1 Accounting R2 ( R1 - R2 ) 2
X Y D2
 115 3 75 5 4.00
109 5 73 6.5 2.25
112 4 85 1 9.00
87 10 70 8 4.00
98 8 76 4 16.00
120 1 82 2 1.00
98 8 65 10 4.00
100 6 73 6.5 0.25
98 8 68 9 1.00
118 2 80 3 1.00
N = 10 ∑ D 2 = 42.50
For repeated ranks find the mean of the ranks.
e.g., Number 98 is repeating three times with the rank 7,8 and 9. The mean of the
ranks is
7  8  9 24
 8
3 3
Therefore the rank for value 98 in all the three places is 8.
Similarly, number 73 is repeating two times. The mean of the ranks is
6  7 13
  6.5
2 2
Therefore the rank for value 73 in both the places is 6.5
Substituting the values from the table, we get
 1 1 
6 D 2  (m3  m)  (m3  m)
rk  1   
12 12
N N
3

 1 1 
642.5  (3 3  3)  (2 3  2)
 12 12 
1
10  10
3

642.5  2  0.5)
1
1000  10

6  45
 1
990
270
 1
990
= 1 – 0.2727272
 r = 0.7272728

1.8 Concurrent deviation method:

This method of studying correlation is the simplest of all the methods. The only
thing required in this method is to find out the direction of change of X variable
and Y variable. The formula to correlation coefficient under this method is given by
 2C  n 
rc     
 n 
Where rc - coefficient of correlation of concurrent deviation
C – Number of concurrent deviation or the number of positive signs obtained after
multiplying Dx and Dy
n – Number of pairs of pairs of deviations i.e., one less than the number of pairs of
observations.

STEPS:
 Find out the direction of change of variable X .i.e. as compared with the first
value whether the second value is increasing or decreasing or a constant. If it is
increasing we assign ‘+’, if it is decreasing we assign ‘-‘, if it is constant we assign
‘0’. Similarly, as compared to second value, we find the third value is increasing,
decreasing or constant. Repeat the same process for other values and denote
Dx .
 In the same manner, we find the change of direction f variable Y and denote
Dy
 Number of positive signs obtained after multiplying D x and D y
 2C  n 
 Apply the formula .i.e. rc     
 n 
Note:
1. If 2C  n is positive, we take positive sign in and outside the square root and
conclude that the variables are positively correlated.
2. If 2C  n is negative, we take negative sign in and outside the square root
and conclude that the variables are negatively correlated.

Problems on concurrent deviation method

1. Find the coefficient of correlation concurrent deviation method.
Supply 150 154 160 172 160 165 180
 Price 200 180 170 160 190 180 172

Solution:
Let X: Supply and Y: Price
X Dx Y Dy C= D x . D y
150 200
154 + 180 - -
160 + 170 - -
172 + 160 - -
160 - 190 + -
165 + 180 - -
180 + 172 - -
C=0

Here N = number of pairs of values of X and Y = 7

n = N-1 = 7-1 = 6
C = the number of positive signs obtained after multiplying D x and D y = 0
Coefficient of correlation using concurrent deviation method

 2C  n   2( 0 )  6 
rc      =    =   (1)  -1
 n   6 
Note that here 2C  n is negative, we assign ‘-’ sign in and outside the root,
Hence there is perfect negative correlation between X and Y.

2. Find the coefficient of correlation concurrent deviation method.

Supply 125 160 164 174 155 170 165 162 172 175
Demand 115 125 192 190 165 174 124 127 152 169

1.9 Questions and Answers:

1. Explain the meaning and significance of the concept of correlation. How will
you calculate it from statistical point of view?
2. Define Karl Pearson’s coefficient of correlation. What is it intended to
measure?
3. How do you interpret a calculated value of Karl Pearson’s coefficient of
correlation? Discuss in particular the values of r=0,r = -1and r = +1.
4. Explain what is meant by coefficient of correlation between two variables.
What are the different methods of finding correlation? Distinguish between
Positive and Negative correlation.

5. In a private data if  X  X  2 = 400,  Y  Y  2

= 25 and  X  X  Y  Y  =
65, find coefficient of correlation.
(Ans. 0.65)

6. In a bivariate data of Cov (X, Y) = 50, Var (X) = 150 and Var (Y) = 144, find
correlation coefficient.
(Ans. 0.34)

7. If bxy = 0.3 and byx = 1.4 find correlation coefficient.

(Ans. 0.65)
8. From the following data in six cities calculate the co-efficient of correlation
between the density of population and death rate
9.
CITY A B C D E F
DENSITY OF POPULATION 200 500 400 700 600 300
POPULATION (IN 000) 30 90 40 42 72 24
NO. OF DEATHS 300 1440 560 840 1224 312
10. Following are the results of B.com Examination in a college. Compare co-
efficient correlation between age and success in the examination and interpret the
result.

11.

AGE OF CANDIDATES 20- 21- 22- 23- 24- 25-

21 22 23 24 25 26
CANDIDATE APPEARED 120 100 70 40 10 5
SUCCESSFUL CANDIDATES 72 55 35 18 4 1
12. The following table gives the distribution of the total population and those
who are totally or partially blind among them. Find out if there is any relation
between age and blindness.

AGE (yrs) 0-10 10- 20- 30- 40- 50- 60- 70-
20 30 40 50 60 70 80
POPULATION (‘000) 100 60 40 36 24 11 6 3
BLIND 55 40 40 40 36 22 18 15

13. Given the following calculate Karl Person’s co-efficient of r between X and Y
series

X Y
Sum of the deviations from assumed mean -14 18
Sum of squares of deviations from assumed mean 4304 6304
Sum of products of deviations from their respective 1510
assumed means
No. of pairs of observations 12

14. The following table gives the distribution of the density of population and the
death rates. Find out if there is any relationship between density of population and
death rate.

15.

DISTRICTS A B C D E
KILOMETERS 120 150 80 50 200
POPULATION 24000 75000 48000 40000 50000
NO. OF DEATHS 288 1125 768 720 650

16. Calculate Karl Pearsons correlation coefficient for the following bivariate data
and comment on the result.
X 33 32 46 36 28 40 35 38 41
Y 31 30 28 26 30 31 30 34 34
(Ans. 0.0615)
17. Calculate Karl Pearsons coefficient of correlation between the marks secured
by 10 students in Statistics and Accountancy (out of 25 marks)
Marks in
18 17 23 22 21 20 19 19 20 21
Statistics
Marks in
Accounta 16 12 20 15 22 15 11 14 19 16
ncy
(Ans. 0.6)

18. For the following data, find the coefficient of correlation and comment on the
result
Supply (Units) 83 91 86 82 80 93 96 89 85
Price (per Unit) 133 117 130 140 146 100 95 115 127
(Ans. −0.9806)

19. Compute correlation coefficient for the following bivariate data

X 100 102 104 105 92 96 98 99 100 93
Y 98 100 103 101 94 92 104 96 95 97
(Ans. 0.6)

20. Calculate Karl Pearsons correlation coefficient for the following data and
comment on the result.
Price (Rs.) 90 80 90 182 120 100
Supply (kg.) 150 100 120 170 160 100
(Ans. 0.7207)

21. Compute correlation coefficient for the following bivariate data.

Cost of
advertising 78 98 75 90 65 39 62 82 25 36
(thousands)
Sales (lakh Rs.) 84 91 68 86 53 47 58 62 60 51
(Ans. 0.7804)

22. Compute rank correlation coefficient for the following data.

X 75 37 35 82 87
Y 46 48 52 63 29
(Ans. 0.4)
23. The following are the marks obtained by 10 students in two subjects X and Y.
Find rank correlation coefficient:
X 76 57 68 47 99 61 44 82 58 30
Y 74 42 72 63 75 41 64 68 67 20
(Ans. 0.7939)

24. Calculate Spearmans correlation coefficient for the following data:

Marks in
16 11 21 20 19 27 37 35 16 26 23
Physics
Marks in
20 28 11 30 27 19 24 29 19 14 30
Chemistry
(Ans. 0.3)

25. Ten competitors were ranked in a beauty contest by three judges. Which pair
of Judges has the common taste is beauty:
Rank of Judge X 1 6 5 9 7 8 10 3 2 4
Rank of Judge Y 3 5 8 1 6 9 4 7 10 2
Rank of Judge Z 6 4 9 10 5 7 8 1 2 3
(Ans. Pxy = -0.21,Pyz = -0.29,Pxz = 0.64) Judges X and Z have common taste in
beauty.

26. Find rank correlation coefficient for the data given below:
X 20 80 40 60 28 12 15 20
Y 30 60 20 10 50 30 40 30

27. Three judges ranked 10 entries in a fashion show. Find out which pair of judges
have the common taste in fashion show.

Judge A 1 5 4 7 8 6 9 3 2 10
Judge B 4 5 7 9 10 3 2 1 6 8
Judge C 6 3 8 0 9 7 4 5 1 2
(Ans: There exist common taste regarding fashion show between I & II, II & III
judges. rk between I & II = 0.3454546, II & III= 0.3434546, III & I =0.9090991)

28. Calculate the coefficient of concurrent deviations from the following data:
 No. of pairs of observations = 96
No. of pairs of concurrent deviations = 36
(r = -0.492)

29. Calculate the coefficient of correlation and find its probable error from the
following data:

X 7 6 5 4 3 2 1

Y 18 16 14 12 10 6 8

(r = 0.9643, P.E. = 0.0179)

30. Calculate the co-efficient of correlation from the following data.

X 48 33 40 9 16 16 65 24 16 57
Y 13 13 24 6 15 4 20 9 6 19

31. Calculate rank correlation co-efficient for the following data:

X 93 85 83 71 69 71 52 71 69 60
Y 98 43 43 43 51 58 60 71 83 51

32.Calculate co-efficient correlation under rank difference method for the

following data.

X 53 98 95 81 70 81 65 81
Y 25 47 82 76 53 61 75 70
ANALYSIS OF BI VARIATE DATA-II - LINEAR REGRESSION ANALYSIS

Structure
1.10 Regression analysis
1.11 Concept of regression lines and regression coefficients
1.12 Terminal Questions

Learning Objectives
To understand
 Regression – Meaning
 Regression lines
 Properties of Regression lines and regression coefficient
 Related problems on regression lines and Regression coefficient.

1.10 Regression Analysis:

Linear Regression Analysis:

Correlation analysis examines the extent and degree of relationship between the
two variables i.e., it measures the closeness with which two or more variables co-
vary in a given period of study. Similarly, we can estimate or predict the value of a
variable given the value of another variable on the basis of some functional
relationship between them. The statistical technique of estimating or predicting
the value of the unknown variable with the value of the known variable is called
Regression Analysis. The unknown value is the dependent variable and the known
value is called the independent variable.

Regression analysis is the theory of estimation of unknown values of a variable

with the help of known values of the other variable
Regression analysis is a statistical technique for estimating the relationships among
variables. It includes many techniques for modeling and analyzing several variables,
when the focus is on the relationship between a dependent variable and one or
more independent variables. More specifically, regression analysis helps one
understand how the typical value of the dependent variable changes when any one
of the independent variables is varied, while the other independent variables are
held fixed. Most commonly, regression analysis estimates the conditional
expectation of the dependent variable given the independent variables — that is,
the average value of the dependent variable when the independent variables are
fixed.

1.11 Concepts of Regression Lines or regression Equations:

When we have two variables say x and y, a mathematical relationship between

them is framed. This can be done using the method of least squares which results
in the following equations known as regression equations.

1. Regression equation of x on y:
Here the assumption is x is treated as a dependent variable and y is treated as
an independent variable. It is given by
( x  x ) = b xy ( y  y )
Here,
x =∑x/n
y=∑y/n
b xy = Regression co efficient of x on y

𝑆𝐷(𝑥)
=r
𝑆𝐷(𝑦)
σx
= r
σy

𝑛∑𝑋𝑌−∑𝑋∑𝑌
= or
𝑛 ∑ 𝑌 2 −(∑𝑌)2
∑( x  x ) ( y y)
=
[∑ ( y  y ) 2]

2. Regression equation of y on x:
Here the assumption is y is treated as a dependent variable and x is treated
as an independent variable. It is given by
( y  y ) = b yx ( x  x )
b yx Regression co efficient of y on x
Here, X
x Y
y
N N
 byx  Regression coefficient of y on x
SD  y 
r
SD  x 
y
r
x

n XY   X  Y

n X 2    X 
2


  x  x  y  y 
  x  x
2

Problems on Regression Equations and Coefficients

1. From the following data
(a) Calculate the two regression equations.
(b) Estimate the value of X when Y = 40.
(c) Determine the value of correlation co-efficient.

X 20 24 26 34 36
Y 10 12 14 18 26

Solution:
X Y X- X Y= Y x2 y2 xy
x y
20 10 -8 -6 64 36 +48
24 12 -4 -4 16 16 +16
26 14 -2 -2 4 4 +4
34 18 +6 +2 36 4 +12
36 26 +8 +10 64 100 +80
2
∑X = 140 ∑Y=80 ∑x=0 ∑y=0 ∑ x = 184 ∑ y2 = 160 ∑ xy = 160

X
X 
140
Y 
Y 
80
N 5 N 5
= 28 = 16
 (a) Regression equation Y on X
y
Y Y  r (X  X )
x

r
y

 x y  160  0.8695652
x  x 184
2

Substituting the values, we get

Y - 16 = 0.8695652 (X – 28)
Y - 16 = 0.8695652 X – 24.347525
Y = 0.8695652 X + 16 – 24.347825
Y = -8.347825 + 0.8695652 X

(b) Regression equation X on Y

x
X X r (Y  Y )
y
 x  x y 160
r   1
 y  y 2 160

X – 28 = 1 (Y – 16)
X – 28 = Y – 16
X = 28 – 16 + Y
X = 12 + Y
(c) When Y = 40, X will be
X = 12 + 40 = 52

(d) r  byx  bxy

 0.8695652  1
 0.8695652
= 0.9325047

2. Obtain the two regression equations from the following:

X series Y series
X 20 25
Variance 4 9
Coefficient of 0.75
correlation
Solution
S.D = variance = x  4  2
y  9  3
Regression equation X on Y
x
X X r (Y  Y )
y
2
X – 20 = 0.75 (Y – 25)
3
X – 20 = 0.5(Y – 25)
X – 20 = 0.5 Y – 12.5
X = 20 – 12.5 + 0.5 Y
X = 7.5 + 0.5 Y

Regression equation Y on X
y
Y Y  r (X  X )
x
3
Y – 25 = 0.75 (X – 20)
2
Y – 25 = 1.125 X – 225
Y = 25 + 1.125 X – 22.5
Y = 2.5 + 1.125 X

3. From the following data find

i) The most probable value of X when Y is 20 and of Y when X is 30.
ii) The co-efficient of correlation.
The mean value of X = 6. The mean value of Y = 8.
The regression co-efficient of X on Y = - 1.3
The regression co-efficient of Y on X = - 0.65

Solution:
Regression equation X on Y
X  X  bxy(Y  Y )
X – 6 = - 1.3 (Y – 8)
X – 6 = - 1.3 Y + 10.4
X = 16.4 – 1.3 Y
When Y = 20, X will be
 X = 16.4 – 1.3  20

= 16.4 – 26 = -9.6
Regression equation Y on X
Y  Y  byx( X  X )
Y – 8 = -0.65 X + 3.9
Y – 8 = -0.65 X + 3.9 Y = 11.9 – 0.65 X
When X = 30, Y will be
Y = 11.9 – 0.65  30
Y = 11.9 – 19.5
= -7.6
r  bxy  byx
  1.3  0.65
 0.845
= 0.9192388

4. To study the relationship between expenditure on accommodation Rs. X and

expenditure on food and entertainment, Rs. Y an enquiry into 50 families gave the
following results.
∑X = 8500, ∑Y = 9600, X =60, Y =20, r = 0.6.
Estimate the expenditure on food and entertainment when expenditure on
accommodation is Rs.200.

Solution:
The required answer can be obtained by regression equation on Y on X.
Regression equation Y on X
y
Y Y  r (X  X )
x
9600
Y  = 192, r = 0.6, Y
50

8500
X   192 , X = 60
50
20
Y – 192 = 0.6 (X – 170)
60
Y – 192 = 0.2 (X – 170)
Y – 192 = 0.2 X – 34
 Y = 158 + 0.2 X
Estimation: When X = 200, the value of Y will be
Y = 0.2 (200) = 158 = 198

1.12 Terminal Questions:

1. Explain the concept of regression and point out its usefulness in dealing
with business problems.
2. Distinguish between correlation and regression analysis and indicate the
utility of regression analysis in economic activities.
3. What is linear regression? Why are there, in general, two regression
lines? When do they coincide? Explain the use of regression equations in
economic enquiry.
4. If bxy = 0.3 and byx = 1.4 find correlation coefficient. (Ans. 0.65)
5. If regression line of Y on X is 3X+4Y=20. Find regression coefficient of Y on X.
(Ans. -0.75)
6. If regression line of X on Y is 5x+2y=16, find regression coefficient of X on Y.
(Ans. -0.4)
7. In a bivariate data given below, estimate the value of Y when X = 10.
X 3 5 1 2 3 1 1 7
Y 5 1 6 0 0 1 2 1
(Ans. Y=0.2)
8. Obtain the regression equation of Y on X for the following bivariate data
X 5 60 50 30 50 10 15 20 30 30
Y 130 395 300 335 350 240 250 300 310 300
(Ans. Y=213+2.8X)
9. Obtain the two regression equations and estimate the sales when the
purchase is equal to 105.
Purchase 62 72 98 76 81 56 76 92 49 88
Sales 112 124 131 117 132 96 120 136 85 97
(Ans. X=0.65Y+0.02, Y=0.78X+56.27, 138.17)

10. Estimate the value of Y when X = 37

X 45 43 46 44 42 40 41
Y 41 39 40 36 38 35 37
(Ans. 33)
11. Obtain the regression line of Y on X for the following data and
i. Estimate Y when X = 48.
ii. Find the correlation coefficient
X 55 56 42 47 36 49 42 60 72 63
Y 150 147 125 128 118 145 140 155 160 149
(Ans. Y=83.76+1.11X, 137.04, 0.84)

12. Obtain the estimate of X when Y=15

X Y
Mean 900 12
S.D. 80 2
r=0.5
(Ans. 960)

13. In a bivariate data, given  X =40,  Y =60,  XY =1150,  Y 2 =4160,

 X 2 =1720 and N=10. Find correlation coefficient and regression
equation of Y on X.
(Ans. 0.37, Y=3.67+0.58Y)

14. Obtain the two regression equations from the following:

A series B series
X 30 32
S.D 16 25

Correlation 0.76
(Ans: Regression on equation X on Y: 14.4352 + 0.4864 Y
Regression on equation Y on X: -3.625 +1.1875 X)

15. Compute the two regression coefficients from the data given below and
find the value of ‘r’ using the same:

X 7 4 8 6 5
Y 6 5 9 8 2
[Ans. bxy=1.2;byx=0.4; r = 0.6928]

16. The following table gives the ages and blood pressure (BP) of 10 women.
 AGE 56 42 36 47 49 42 60 72 63 55
BP 147 125 118 128 145 140 155 160 149 15
0
(i) Find the correlation coefficient between X and Y.
(ii) Determine the regression equation of Y on X.
(iii) Estimate the blood pressure of a women whose age is 45 years.
[Ans. (i) r = 0.89 (ii) Y= 83.758 +1.11 X (iii) Y=134]
17. For a bivariate data the mean value of X is 20 and the mean value of Y is
45. The regression coefficient Y on X is 4 and that of X on Y is 1/9. Find
i. The coefficient of correlation.
ii. The standard deviation of X if the standard deviation of Y is 12.
iii. Also write down the equations of regression lines.
((i) 0.67 (ii) 2 (iii) y = 4x-35, 9x = y+135)
18. A panel of judges A and B graded seven debators and independently
awarded the following marks:
Debator 1 2 3 4 5 6 7

Marks 40 34 28 30 44 38 31
by A
Marks 32 39 26 30 38 34 28
by B
An eighth debator was awarded 36 marks by Judge A while Judge B was
not present. If Judge B was also present, how many marks would you
expect him to award to eighth debator assuming same degree of
relationship exists in judgement?
(33 marks)

19. Construct two regression equations for the following data and estimate the
value of X when Y = 70 and Y when X = 650.

X 100 200 300 400 500 600 700

Y 30 50 60 80 100 110 130

20. Find the two regression equation from the following data:
X 5 4 3 16 10 8 3
 Y 10 15 12 9 12 4 1

21.The following data related to the ages of husbands and wives.

Age of husbands 25 28 30 32 35 36 38 39 42 55
Age of wives 20 26 29 30 25 18 26 35 35 46

Obtain the two regression equations and determine the most likely ages of
husband for the age of wife 25 years.

22.Find the regression equations from the following and estimate the yield for 10
inches rainfall.
Rainfall (in inches) X 1 2 3 4 5 6 7 8 9
Yield (tons) y 1 3 2 5 5 7 6 9 8
23. From the following results obtain the regression equations and estimate the
yield of crops when rainfall is 29 cms and estimate the rain fall when the yield is
600 kg.

Rainfall Yield
(in cms) (in kgs.)
X 26.7 508.4
S.D 4.6 36.8
Coefficient of 0.52
Correlation