Measures of Location

Mean (Arithmetic Mean)

Median
Mode
Geometric Mean

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Measures of Location
Mean/Arithmetic Mean
• Average value for a variable
• The mean is denoted by
• n = sample size
• = value of variable x for the first observation
• = value of variable x for the second observation
• = value of variable x for the nth observation

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
2
Table 2.9:
Data on Home Sales in Cincinnati, Ohio, Suburb

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
3
Computation of Sample Mean
Illustration: Computation of the mean home selling price for the sample
of 12 home sales

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
4
Measures of Location
Median
• Value in the middle when the data are arranged in ascending order
• Middle value, for an odd number of observations
• Average of two middle values, for an even number of observations

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
5
Computation of Sample Median
Illustration: When the number of observations are odd
• Consider the class size data for a sample of five college classes:
46 54 42 46 32
• Arrange the class size data in ascending order
32 42 46 46 54
• Middlemost value in the data set = 46
• Median is 46

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
6
Computation of Sample Median
Illustration - When the number of observations are even
• Consider the data on home sales in Cincinnati, Ohio, Suburb (Table 2.9)
• Arrange the data in ascending order:
108,000 138,000 138,000 142,000 186,000 199,500 208,000 254,000
254,000 257,500 298,000 456,250
• Median = average of two middle values
= "199,500 + 208,000" /"2" = 203,750
Middle Two Values

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
7
Measures of Location
Mode
• Value that occurs most frequently in a data set
• Consider the class size data:
32 42 46 46 54
• Observe - 46 is the only value that occurs more than once
• Mode is 46
• Multimodal data - Data contain at least two modes
• Bimodal data - Data contain exactly two modes

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
8
Figure 2.16: Calculating the Mean, Median, and
Modes for the Home Sales Data using Excel

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
9
Measures of Location
Geometric Mean
• nth root of the product of n values
• Used in analyzing growth rates in financial data.
• Sample geometric mean

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
10
Table 2.10: Percentage Annual Returns and
Growth Factors for the Mutual Fund Data
• Illustration: Consider the percentage annual returns and growth factors for
the mutual fund data over the past 10 years
• We will determine the mean rate of growth for the fund over the 10-year
period

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
11
Computation of Geometric Mean
• Solution:
• Product of the growth factors:
$100(.779)(1.287)(1.109)(1.049)(1.158)(1.055)(.630)(1.265)(1.151)(1.021)
= 1.335
• Geometric mean of the growth factors:
= = 1.029
• Conclude that annual returns grew at an average annual rate of
(1.029 – 1)100% or 2.9%

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
12
Figure 2.17: Calculating the Geometric Mean for the Mutual Fund
Data Using Excel

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
13
Measures of Variability
Range
Variance
Standard Deviation
Coefficient of Variation

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Measures of Variability
Table 2.11: Annual Payouts for Two Figure 2.18: Histograms for Payouts of
Different Investment Funds Past 20 Years from Fund A and Fund B

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
15
Computation of Range
Range
• Found by subtracting the smallest value from the largest value in a data
set
• Illustration: Consider the data on home sales in Cincinnati, Ohio, suburb
• Largest home sales price: $456,250
• Smallest home sales price: $108,000
• Range = Largest value – Smallest value
= $456,250 – $108,000
= $348,250
• Drawback: Range is based on only two of the observations and thus is
highly influenced by extreme values
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
16
Measures of Variability
Variance
• Measure of variability that utilizes all the data
• It is based on the deviation about the mean, which is the difference
between the value of each observation (xi) and the mean
• The deviations about the mean are squared while computing the
variance
• Sample variance, =
• Population variance , =

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
17
Table 2.12: Computation of Deviations and Squared
Deviations about the Mean for the Class Size Data

Computation of Sample Variance:

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
18
 Mean only -- Not enough for analysis
Sample 1 Sample 2 Sample 3
1 3 6
2 3 6
3 3 3
4 3 0
5 3 0
Mean 3 3 3
Variance 2.5 0 9
In the three samples above, the means are the same, and the sample sizes are also the same.
But do you think that these three samples are similar to each other?
The variance can provide more information to tell that they are very different.

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
 Why is the variance formula so complicated?
data set = x1 x2 x3 …… xn
n = sample size (number of data in the data set)
mean = [x1 + x2 + x3 + …… + xn ] / n OR n  mean = x1 + x2 + x3 + …… + xn
variance = [(x1 – mean)2 + (x2 – mean)2 + (x3 – mean)2 + …… + (xn – mean)2 ] / (n - 1)

But why not simply using this expression without squares:

[(x1 – mean) + (x2 – mean) + (x3 – mean) + …… + (xn – mean)] / (n - 1)
= [x1 + x2 + x3 + …… + xn – (n  mean)] / (n - 1)
= [n  mean – (n  mean)] / (n - 1)
= 0 / (n - 1)
=0
It is always equal to zero and useless.

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
 A real example
data set = 1, 2, 3, 4, 5
5 = sample size (number of data in the data set)
mean = 3 = [1 + 2 + 3 + 4 + 5 ] / 5 OR 5  3 = 1 + 2 + 3 + 4 + 5

[(x1 – mean) + (x2 – mean) + (x3 – mean) + …… + (xn – mean)] / (n - 1)

= [(1 – 3) + (2 – 3) + (3 – 3) + (4 – 3) + (5 – 3)] / (5 - 1)
= [1 + 2 + 3 + 4 + 5 – (5  3)] / (5 - 1)
= [5  3 – (5  3)] / (5 - 1)
= 0 / (5 - 1)
=0

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Measures of Variability
• Standard Deviation
• Positive square root of the variance
• Measured in the same units as the original data
• For sample , s =
• For population, σ =
• Coefficient of Variation

• Measures the standard deviation relative to the mean

• Expressed as a percentage

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
22
Computation of Coefficient of
Variation
Illustration:
• Consider the class size data:
46 54 42 46 32
• Mean, = 44
• Standard deviation, s = 8
• Coefficient of variation = % = 18.2%

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
23
Figure 2.19: Calculating Variability Measures for the Home Sales
Data in Excel

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
24
But why standard deviation?

• Larger variance, larger standard deviation. So, why bother one more
thing?
• Suppose you measure the length of some objects.
• The data may be 1cm, 2cm, 3cm, etc.
• The unit of variance becomes cm2 that represents an area, not the
length.
• The unit of standard deviation is cm that represents the length.
• So, standard deviation and the data are with the same unit. It is
logical for comparison.
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.