Chapter 4:

Descriptive Statistical Measures

Business Analytics, 1st edition

James R. Evans

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-1
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-2
Chapter 4 Topics
 Populations and Samples
 Measures of Location
 Measures of Dispersion
 Measures of Shape
 Excel Descriptive Statistics Tool
 Descriptive Statistics for Grouped Data
 Descriptive Statistics for Categorical Data: The Proportion
 Statistics in PivotTables
 Measures of Association
 Outliers
 Statistical Thinking in Business Decisions

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-3
Populations and Samples
 Population - all items of interest for a particular
decision or investigation
- all married drivers over 25 years old
- all subscribers to Netflix
 Sample - a subset of the population

- a list of individuals who rented a comedy from

Netflix in the past year
 The purpose of sampling is to obtain sufficient

information to draw a valid inference about a

population.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-4
Measures of Location

Arithmetic Mean
 For a population of size N:

 For a sample of n observations:

 Excel function: =AVERAGE(data range)

 Property of the mean:
 Outliers can affect the value of the mean.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-5
Measures of Location
Example 4.1 Computing Mean Cost per Order
(Purchase Orders data)
 Using formula:

Mean = $2,471,760/94
= $26,295.32

Figure 4.1

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-6
Measures of Location
Example 4.1 (continued)
Computing Mean Cost per Order

Applying Formula
=Sum(B2:B95)/Count(B2:B95)

Using Average Function

=Average(B2:B95)

Figure 4.2

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-7
Measures of Location
Example 4.2 Finding the Median Cost per Order
(Purchase Orders data)
Median - middle value of the data when arranged
from least to greatest
Sort the data in column B.
Since n = 94,
Median = $15,656.25
= average of 47th and
48th observations.

=MEDIAN(B2:B94)
=Average(B48,B49)
Figure 4.3

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-8
Measures of Location
Example 4.3 Finding the Mode of A/P terms
(Purchase Orders data)
 Mode - observation that occurs most often or, for

grouped data, the group with the greatest

frequency.
 Mode of A/P terms:
= 30 months
=MODE.SNGL(H4:H97)
Figure 3.29

 For multiple modes: =MODE.MULT(data range)

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-9
Measures of Location
Example 4.4 Computing the Midrange
(Purchase Orders data)
 Midrange = Average of greatest and least values
 Use the Excel MIN and MAX functions or Sort the

data and find them easily.

 Cost per order midrange:
= ($68.78 + $127,500)/2
= $63,784.89
=AVERAGE(MIN(B2:B95), MAX(B2:B95))

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-10
Measures of Location

Example 4.5 Quoting Computer Repair Times

Data set includes 250 repair times for customers.
 What repair time would be
reasonable to quote to a
new customer?
 Median repair time is 2

weeks; Mean and Mode are

about 15 days.
 Let’s look at a histogram to

get a better idea.

Figure 4.4

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-11
Measures of Location
Example 4.5 (continued)
Quoting Computer Repair Times

90% are completed within 3 weeks

Figure 4.5

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-12
Measures of Dispersion
 Dispersion refers to the degree of variation in the
data.
 Range is the difference between the maximum

and minimum data values.

 Interquartile Range (IQR) is difference between

the third and first quartiles.

 Variance is an average of the squared deviations

form the mean (uses all data values).

 Standard Deviation is the square root of the

variance.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-13
Measures of Dispersion

Example 4.6 Computing the Range

(Purchase Orders data)
For the cost per order data:
 Maximum = $127,500
 Minimum = $68.78
 Range = $127,431.22

=MAX(B2:B95)−MIN(B2:B95)

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-14
Measures of Dispersion
Example 4.7 Computing the Interquartile Range
(Purchase Orders data)
For the cost per order data:
 Third Quartile = Q = $27,593.75
3

=QUARTILE.INC(B2:B95,3)
 First Quartile = Q = $6,757.81
1

=QUARTILE.INC(B2:B95,1)
 Interquartile Range = $20,835.94

The middle 50% of the data is concentrated in a small range of $20,836.

The range of the full data set is affected by extreme values.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-15
Measures of Dispersion

Computing the Variance

 For a population:

 In Excel: =VAR.P(data range)

 For a sample:

 In Excel: =VAR.S(data range)

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-16
Measures of Dispersion
Example 4.8 Computing the Variance
(Purchase Orders data)

Figure 4.6

=VAR.S(B2:B95)
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-17
Measures of Dispersion

Computing the Standard Deviation

 For a population:

=STDEV.P(data range)

 For a sample:

=STDEV.S(data range)

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-18
Measures of Dispersion
  

Figure 4.6

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-19
Measures of Dispersion

Mean & Standard Deviation of Closing Stock Prices

Intel (INTC):
Mean = $18.81
Stdev. = $0.50
General Electric (GE):
Mean = $16.19
Stdev. = $0.35

INTC is a higher risk

investment than GE. Figure 4.7

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-20
Measures of Dispersion
Chebyshev’s Theorem
For any data set, the proportion of values that lie
within k (k > 1) standard deviations of the mean is
 at least 1 – 1/k2

Empirical Rules
For many data sets encountered in practice:
 Approximately 68% of the observations fall within

one standard deviation of the mean; that is, between

 Approximately 95% fall within 2 
 Approximately 99.7% fall within 3 

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-21
Measures of Dispersion
Example 4.10 Applying Chebyshev’s Theorem
(Purchase Orders data)
For the cost-per-order data
 When k = 2, 1-1/k2 = 75%

Mean ± 2(Stdev.) = [-$33,390.34, $85,980.98]

89 of the 94 data values (94.68%)
 When k = 3, 1-1/k2 = 89%
Mean ± 3(Stdev.) = [-$63,233.17, $115,823.81]
92 of the 94 data values (97.9%)

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-22
Measures of Dispersion

Process Capability Index (Cp)

 To measure how well a manufacturing process
can achieve specifications, take a sample of
output, measure dimensions, compute the total
variation using the third empirical rule.
 Compare results to specifications using:

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-23
Measures of Dispersion
Example 4.11 Using the Empirical Rule to Measure
the Capability of a Manufacturing Process
Cp = 0.57
Cp < 1 indicates
variation is
wider than
specified.
Want Cp ≥ 1
or Cp ≥ 1.5

Figure 4.8

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-24
Measures of Dispersion
Example 4.11 (continued)
 3+3+1+1 = 8 of 200 (4%) fall outside the

specification limits of between 4.8 and 5.2.

 3rd Empirical Rule: approximately 0.3% of the data

falls outside 3 standard deviations of the mean.

 Chebyshev’s Theorem: less than 11% fall outside.

Figure 4.9

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-25
Measures of Dispersion
Example 4.12 Computing z-scores
(Purchase Orders data)

=STANDARDIZE(x, mean, standard deviation)

Figure 4.10

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-26
Measures of Dispersion

Coefficient of Variation (CV)

 Provides a relative measure of dispersion

 Sometimes measured as a percentage.

 Provides a relative measure of risk to return.
 Return to risk = 1/CV
 Sharpe ratio is a related measure in finance.
 Sharpe ratio = excess returns/standard deviation

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-27
Measures of Dispersion
Example 4.13 Applying the Coefficient of Variation
 Intel (INTC) is slightly riskier than the other stocks.
 The Index fund has the least risk (lowest CV).

Figure 4.11

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-28
Measures of Shape
 Skewness describes lack of symmetry.

 Coefficient of Skewness =

=SKEW(data, range)
 CS is negative for left-skewed data.
 CS is positive for right-skewed data.
 |CS| > 1 suggests high degree of skewness.
 0.5 ≤ |CS| ≤ 1 suggests moderate skewness.
 |CS| < 0.5 suggests relative symmetry.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-29
Measures of Shape

Example 4.14 Measuring Skewness

 For cost per order: CS = 1.66 (high)
 For A/P terms: CS = 0.60 (moderate)

Figure 4.12

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-30
Measures of Shape
 Kurtosis refers to peakedness or flatness.

 Coefficient of Kurtosis =
=KURT(data, range)
 CK < 3 indicates the data is somewhat flat with a
wide degree of dispersion.
 CK > 3 indicates the data is somewhat peaked
with less dispersion.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-31
Measures of Shape

Negatively skewed Positively skewed

Mean < Median < Mode Mode < Median < Mean

Figure 4.13

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-32
Excel Descriptive Statistics Tool
This tool provides a summary of numerical
statistical measures for sample data.

Data
Data Analysis
Descriptive Statistics
 Enter Input Range
 Labels (optional)
 Summary Statistics

Figure 4.14

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-33
Excel Descriptive Statistics Tool

Example 4.15 Using the Descriptive Statistics Tool

Descriptive Statistics for Cost per order and A/P terms

Results of the
Analysis Toolpak
do not change
when changes
are made to the
data itself.

Figure 4.15

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-34
Descriptive Statistics for Grouped Data

Computing Statistical Measures from Frequency

Distributions
 Mean formulas:

 Variance formulas:

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-35
Descriptive Statistics for Grouped Data
Example 4.16 Computing Statistical Measures from
Frequency Distributions (Computer Repair Times)

Figure 4.16

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-36
Descriptive Statistics for Grouped Data

Example 4.17 Computing Descriptive Statistics for

a Grouped Frequency Distribution
We can use
group midpoints
as approximate
percentages of
household
income spent on
rent (except in
rows 13, 14).
Figure 4.17

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-37
Descriptive Statistics for Grouped Data

Example 4.17 (continued)

Our calculations indicate that the typical renter
spends about 30% of household income on rent.

Figure 4.18

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-38
Descriptive Statistics for Categorical
Data: The Proportion
Example 4.18 Computing a Proportion
 Proportion of orders placed by Spacetime Technologies
=COUNTIF(A4:A97, “Spacetime Technologies”)/94
= 12/94 = 0.128

Figure 4.1

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-39
Statistics in PivotTables
Statistical Measure Choices in PivotTables
Under Value Field Settings:
 Average
 Max and Min
 Product
 Standard deviation
 Variance

Figure 4.19

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-40
Statistics in PivotTables

Example 4.19 Statistical Measures in PivotTables

(Credit Risk Data)
Fields: Checking
Savings
Job Classif.
Row Labels: Job
Σ Values:
Average Checking
Average Savings

Figure 4.20
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-41
Measures of Association
 Data from 49 top liberal arts and research
universities can be used to answer questions:
 Is Top 10% HS related to Graduation %?
 Is Accept. Rate related to Expenditures/Student?
 Is Median SAT related to Acceptance Rate?

Figure 4.21

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-42
Measures of Association
 Covariance is a measure of the linear association
between two variables, X and Y.

 For a population:

=COVARIANCE.P(array1, array2)

 For a sample:

=COVARIANCE.S(array1, array2)
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-43
Measures of Association
Example 4.20 Computing the Covariance
 Scatterplot of the Colleges and Universities data

Figure 4.22

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-44
Measures of Association
Example 4.20 (continued)
Computing the Covariance

Figure 4.23

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-45
Measures of Association
 Correlation is a measure of the linear association
between two variables, X and Y.
 Correlation Coefficient formulas:
For a population:

For a sample:
=CORREL(array1, array2)

 The Correlation Coefficient does not depend upon

units of measurement (unlike covariance).
 Also known as the:
Pearson product moment correlation
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-46
Measures of Association

Figure 4.24

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-47
Measures of Association

Example 4.21 Computing the Correlation Coefficient

(Colleges and Universities data)
 Graduation % and Median SAT

Figure 4.25

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-48
Measures of Association

Excel Correlation Tool

 Data
 Data Analysis
 Correlation

Excel computes the

correlation coefficient Figure 4.26

between all pairs of variables in the Input Range.

Input Range Data must be in contiguous columns.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-49
Measures of Association

Example 4.22 Using the Correlation Tool

(Colleges and Universities data)

Figure 4.27

 Lower acceptance rate, higher median SAT

 Lower acceptance rate, higher % top 10 HS students
 Lower acceptance rate, higher graduation rate
 Higher median SAT, higher graduation rate

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-50
Outliers

The Mean and Range are sensitive to outliers.

How do we identify outliers?
Some possible methods to identify outliers are:
 z-scores greater than +3 or less than -3
 extreme outliers are more than 3*IQR to the left of

Q1 or right of Q3
 mild outliers are between 1.5*IQR and 3*IQR to

the left of Q1 or right of Q3

There is no standard definition of what constitutes
an outlier.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-51
Outliers
Example 4.23 Investigating Outliers
(Home Market Value data)

Note that the

complete data set
has 43 observations.

Figure 4.28

 Are any homes outliers?

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-52
Outliers

Example 4.23 (continued) Investigating Outliers

None of the
z-scores for
Square Feet
or
Market Value
exceed 3.

Figure 4.29

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-53
Outliers

Example 4.23 (continued) Investigating Outliers

The house with a

market value
near $120,000
and square
footage near
1600 does not fall
in line with the
rest of the data.

Figure 4.30

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-54
Statistical Thinking in Business Decisions

Statistical Thinking is a philosophy of learning and

action for improvement, based on principles that:
 all work occurs in a system of interconnected

processes
 variation exists in all processes
 better performance results from understanding

and reducing variation

Business Analytics provide managers with insights
into facts and relationships that enables them to
make better decisions.
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-55
Statistical Thinking in Business Decisions

Example 4.24 Applying Statistical Thinking

 Average infection rate = 0.0072
 Standard deviation = 0.0053

Figure 4.31
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-56
Statistical Thinking in Business Decisions
Example 4.24 (continued) Applying Statistical
Thinking (Surgery Infections data)
 Control limits set at z-scores of -3 and +3
 Control limits: -0.009 (set to 0) and 0.0023

Figure 4.32

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-57
Statistical Thinking in Business Decisions
Example 4.25 Variation in Sample Data
 Population: 250 computer repair times
 μ = 14.91 days, σ2 = 35.5 days2

Two samples of size n = 50

Figure 4.33

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-58
Statistical Thinking in Business Decisions

Example 4.25 (continued) Variation in Sample Data

 The two n = 25 samples have higher variation

than the population and the n = 50 samples.

Two samples of size n = 25

Figure 4.34
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-59
Statistical Thinking in Business Decisions
Analytics in Practice:
Applying Statistical Thinking to
Detecting Financial Problems
Sarbanes-Oxley Act (2002)
 helped improve the quality of data that companies

disclose to the public but companies can still

commit financial fraud.
Anomaly detection scores (a form of z-score) are
often used by the SEC to detect companies
committing financial fraud.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-60
Chapter 4 - Key Terms
 Arithmetic mean (mean)  Covariance
 Bimodal  Dispersion
 Chebyshev’s theorem  Empirical rules
 Coefficient of kurtosis  Interquartile range
 Coefficient of skewness (midspread)
 Coefficient of variation  Kurtosis

 Correlation  Median

 Correlation coefficient  Midrange

(Pearson product  Mode

moment correlation  Outlier
coefficient)
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-61
Chapter 4 - Key Terms (continued)
 Population  Standard deviation
 Process capability  Standardized value

index (z-score)
 Proportion  Statistical thinking
 Range  Unimodal
 Return to risk  Variance
 Sample
 Sample correlation

coefficient
 Skewness

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-62
Case Study
Performance Lawn Equipment (4)
 Recall that PLE produces lawnmowers and a
medium size diesel power lawn tractor.
 Compute the mean satisfaction ratings by year and
region and provide descriptive statistics for the
2012 customer survey data.
 Determine how responses times change quarterly.
 Examine changes in defects over time.
 Compare sales with industry totals and write a
formal report summarizing your results.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 4-63
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall 4-64