Learning Outcomes:

1. Explain the difference between Populations and Samples

2. Understand and be able to distinguish and apply the different measures:

• Measures of Location (Mean, Median, Mode),
• Measures of Dispersion (Range, Variance, Standard Deviation, Chebyshev’s Theorem,
Coefficient of Variation)
• Measures of Shape (Skewness, Kurtosis)
• Measures of Association (Covariance and Correlation)

3. Be able to identify outliers

Population and Samples:

Population refers to all items of interest for a particular decision or investigation. A sample is a
subset of the population. The purpose of sampling is to obtain sufficient information to draw a
valid inference about the population.

Measures of Location – Mean, Median and Mode:

Mean also commonly known as average. µ is the population mean while X̄ is the sample
mean. Can be found using mean(), rowmean() or describe() and summary()

For a population For a sample of

of size N: n observations:

Median is the middle value of the data when arranged in ascending order. Can be found using
the median(), describe() or summary() function.

Mode is the observation that occurs most frequent or, for grouped data, the group with the
greatest frequency. Can be found using names(Table)[Table==max(Table)]

Measures of Dispersion:
Dispersion refers to the degree of variation (numerical spread or compactness) in the data.

Range is the difference between the maximum and minimum data values. Interquartile range is
the difference between the first and third quartiles (Q3 – Q1) (uses middle 50% data)

Using summary() and describe()

Variance is the average of squared deviations from mean. Note the difference in denominators.

Standard deviation is the square root of the variance. σ is the population standard deviation
while s is the sample standard deviation.

For a population: For a sample:

[(N-1)/N]*var(X) var(X)

For a population:
For a sample:
sd(X)
Sqrt((N-1)/N)*var(X)

Chebyshev’s Theorem states that: 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.
For k=2: at least ¾ or 75% of the data lie within two standard deviations of the mean.
For k=3: at least 8⁄9 or 89% of the data lie within three standard deviations of the mean.

For normally distributed data set, the proportion of values that lie within k (k > 1) standard
deviations of the mean follows the empirical rules:
For k=1: about 68% lie within one standard deviations of the mean.
For k=2: about 95% lie within two standard deviations of the mean.
For k=3: about 99.7% lie within three standard deviations of the mean.

Applying 2 sd interval Applying 3 sd interval

94.68% falls within 2 97.87% falls within 3
sd of the mean. sd of the mean.
75% according to 89% according to
Chebyshev’s theorem Chebyshev’s theorem.
Applications of Empirical Rule:
1. Process Capability Index (CP):
It is a measure of how well a manufacturing process can achieve specifications. Using a sample
of output, measure the dimension of interest, and compute the total variation using the third
empirical rule (±3 standard deviation). Compare results to specifications using:

Upper Specification – Lower Specification *Total Variation is the:

CP =
Total Variation [(Mean + 3*SD) – (Mean – 3*SD)]

In practice: Aim for CP => 1.5.

2. Standardised Values:
A standardised value, commonly called a z-score, provides a relative measure of the distance an
observation is from the mean (independent of units of measurement).

3. Coefficient of Variation (CV):

CV provides a relative measure of dispersion in data relative to the mean. It can also be
expressed as a percentage. It provides a relative measure of risk to return.
Return to risk = 1/CV, is often easier to interpret, especially in financial risk analysis. The
Sharpe ratio is a related measure in finance.

Measures of Shape:
Skewness describes a lack of symmetry of data. Distributions that tail off to the right are called
positively skewed; those that tail off to the left are said to be negatively skewed.

Coefficient of skewness (CS) is a measure of skewness. CS is

negative for left-skewed data; 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.

If distribution was perfectly

symmetrical and unimodal, the
mean, median, and mode would
all be the same.
If it were negatively skewed,
mean < median < mode. Positive skewness would suggest that mode < median < mean.
Kurtosis refers to the peakedness (i.e. high, narrow) or flatness (i.e. short, flat-topped) of a
histogram. Coefficient of kurtosis (CK) measures the degree of kurtosis of a population:

 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.

Descriptive Statistics for Categorical Data: The Proportion

Proportion (p), is the fraction of data that have a certain characteristic. Proportions are key
descriptive statistics for categorical data, such as defects or errors in quality control applications
or consumer preferences in market research. Find the number of observations for each
category and divide by the total number of observations. (Subset/nrow())

Measures of Association:
Covariance is a measure of the linear association between two variables, X and Y.

Correlation is a measure of the linear association between two variables X and Y and it is not
dependent on the units of measurement. Range: -1 (Strong negative) and 1 (Strong positive
linear relationship); 0 indicates no linear relationship. Use corr()

Covariance Correlation
For a For a
population population

For a For a
sample sample
Proportions:
Proportion (p), is the fraction of data that have a certain characteristic. Proportions are key
descriptive statistics for categorical data, such as defects or errors in quality control applications
or consumer preferences in market research.

Outliers:
Mean and Range are sensitive to outliers. There is no standard definition of what constitutes an
outlier. How do we identify potential outliers? Some rules of thumb:
1. z-scores > +3 or < -3 *(< 0.3% for normal data)
2. Extreme outliers are > 3*IQR to the left of Q1 or right of Q3
3. Mild outliers are between 1.5*IQR and 3*IQR to the left of Q1 or right of Q3

dataframe$zscore <- (dataframe$Column - mean(dataframe$Column)) /

sd(dataframe$Column)
outliers.zs <- subset(dataframe, dataframe$zscore < -3 | dataframe$zscore > 3)
q1 <- as.numeric(quantile(dataframe$Column, 0.25))
q3 <- as.numeric(quantile(dataframe$Column, 0.75))
iqr <- IQR(dataframe$Column)
lower.extreme <- q1 - 3*iqr
upper.extreme<- q3 + 3*iqr
min(dataframe$Column) < lower.extreme #False
max(dataframe$Column) > upper.extreme #True
outliers.e <- dataframe[dataframe$Column> upper.extreme, ]
nrow(outliers.e) #8

What to do with outliers?

1. Leave them in the data if it is important
2. Remove them if they are different from the rest
3. Correct error in data entry

Statistical Thinking in Business DM

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.

Variability in Samples
1. Different samples from any population will vary:
 different means, standard deviations, and other statistical measures
 differences in shapes of histograms

2. Samples are extremely sensitive to the sample size – the number of observations included
in the samples.