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OPRE 6301/SYSM 6303

Quantitative Introduction to Risk and
Uncertainty in Business
4-1

Chapter Four
Numerical Descriptive Techniques

4-2

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Measures of Central Location

Arithmetic Mean
Mean or Average
N

Population Mean:

i 1

N
n

Sample Mean:

x
i 1

xi = the data values labeled 1 through N or n

4-3

Measures of Central Location

Mean Time Spent on the Internet
0

12

33

14

22

4-4

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Measures of Central Location

Median
The middle value

Median Time Spent on the Internet

Must first sort the date into ascending order
0

12

14

22

33

4-6

Measures of Central Location

Median Long-Distance Telephone Bill
Recall our Long-Distance Telephone Bill
Data from Data File Xm03-01.xls
Interpretation: half the telephone bills are
below 26.905 and half are above 26.905
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Measures of Central Location

Mode
Observation that occurs most frequently

Mode Time Spent on the Internet

Best to sort the date into ascending order
0

12

14

22

33

4-8

Measures of Central Location

Mode Long-Distance Telephone Bill
Recall our Long-Distance Telephone Bill
Data from Data File Xm03-01.xls
Two issues with the mode:
may not be central
may not be unique
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Measures of Variability
Range
Largest observation Smallest observation

Advantage: simple
Disadvantage: simple

4-11

Measures of Variability
Range
Set 1
4

50

39

50

Set 2
4

15

24

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Measures of Variability
Variance
N

Population Variance:

i 1

N
n

Sample Variance:

s2

x x

i 1

n 1

Why dividing by n-1.pdf

4-13

Measures of Variability
Calculating Sample Variance
8
xi

xi x

11

xi x 2

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Measures of Variability
Standard Deviation
Population St. Deviation:

Sample St. Deviation:

s s2

Recall our Long-Distance Telephone Bill

Data from Data File Xm03-01.xls
4-17

Measures of Variability
Comparing Two Data Sets
Lets explore the interpretation of variance
using Excel and Data File Xm04-08.xls

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Empirical Rule

4-19

Empirical Rule - example

A histogram of returns on an investment is bellshaped and has a mean of 10% and a s = 8%.
How is the distribution of the returns?

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Chebysheffs Theorem
The proportion of observations
in any sample or population that lie
within k standard deviations of the mean
is at least
1

1
for k 1
k2

4-21

Chebysheffs Theorem
example
Salaries of a computer store are positively
skewed. Mean =$28,000, std.dev=$3,000.
What can you say about these salaries?

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Measures of Variability
Coefficient of Variation
ratio of standard deviation to mean
Population Coeff. Of Variation:

CV

Sample Coeff. Of Variation:

cv

s
x

4-23

Measures of Relative Standing

Percentile
the Pth percentile is the value for which
P% are less than that value and
(100-P)% are greater than that value

4-24

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Measures of Relative Standing

Quartiles
Values that divide our data set into fourths
Q1 = 25th percentile
Q2 = 50th percentile
Q3 = 75th percentile

4-25

Measures of Relative Standing

The location of a percentile

LP n 1

P
100

4-26

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Measures of Relative Standing

Calculate the 25th, 50th and 75th Percentiles
for Time Spent on the Internet(Quartiles)
0

12

14

22

33

4-27

Measures of Relative Standing

Interquartile Range
another measure of variability

IQR Q3 Q1

4-31

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Box Plot
Graph of five statistics
Minimum and maximum data values
1st, 2nd and 3rd Quartiles
Determine outliers using IQR
1.5 times IQR less than Q1
1.5 times IQR larger than Q3
4-33

Measures of Linear Relationship

Covariance
N

Population Covariance:

xy

x
i 1

x y i y

N
n

Sample Covariance:

sxy

x
i 1

x y i y
n 1

4-36

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Measures of Linear Relationship

Calculating Covariance

mean

24

27

18

23

xi x yi y xi x yi y

4-37

Measures of Linear Relationship

Coefficient of Correlation
Population Correlation:

xy

Sample Correlation:

rxy

1 1

xy
x y
sxy
sx sy

1 r 1
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Measures of Linear Relationship

Least Squares Method
Simple Linear Regression
(simple => two variables only)
Two variables
Independent Variable
Dependent Variable
4-40

Measures of Linear Relationship

Which variable is which?
Example:
Salary vs. Grocery Bill

4-41

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Measures of Linear Relationship

Lets explore the Least Squares Method
using Data File Xm04-17.xls

4-42

Measures of Linear Relationship

Regression Line
+e

-e

4-43

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Measures of Linear Relationship

Least Squares Method

y b0 b1x

y mx b

4-44

Measures of Linear Relationship

Least Squares Method

b1

sxy
sx2

b0 y b1x
4-45

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