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Measures of Central Tendency

Measures of Location
Mean
Median
Mode
Geometric Mean
Measures of Central Tendency:
Summary

Central Tendency

Arithmetic Median Mode Geometric Mean


Mean
n

X i
XG ( X1 X2 Xn )1/ n

X i 1
n Middle value Most Rate of
in the ordered frequently change of
array observed a variable
value over time

Chap 3-2
Summary Definitions

The measure of location or central tendency


is a central value that the data values group
around. It gives an average value.

The measure of dispersion shows how the


data is spread or scattered around the mean.

The measure of skewness is how symmetrical


(or not) the distribution of data values is.

Chap 3-3
Measures of Central Tendency:
The Mean

The arithmetic mean (often just called mean)


is the most common measure of central
tendency
Pronounced x-bar
The ith value
For a sample of size n:
n

X i
X1 X2 Xn
X i1

n n
Sample size Observed values

Chap 3-4
Measures of Central Tendency:
The Mean
(continued)

The most common measure of central tendency


Mean = sum of values divided by the number of values
Affected by extreme values (outliers)

0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10

Mean = 3 Mean = 4
1 2 3 4 5 15 1 2 3 4 10 20
3 4
5 5 5 5

Chap 3-5
Numerical Descriptive Measures
for a Population: The mean
The population mean is the sum of the values in
the population divided by the population size, N

X i
X1 X2 XN
i1

N N
Where = population mean
N = population size
Xi = ith value of the variable X
Chap 3-6
Approximating the Mean from a
Frequency Distribution
Use the midpoint of a class interval to approximate the
values in that class

x f
j1
j j

X
n
Where n = number of values or sample size
c = number of classes in the frequency distribution
xj = midpoint of the jth class
fj = number of values in the jth class

Chap 3-7
Mean of Wealth
The Distribution of Marketable Wealth, UK, 2001

Wealth Boundaries Mid interval(000) Frequency(000)


Lower Upper x f fx
0 9999 5.0 3417 17085.0
10000 24999 17.5 1303 22802.5
25000 39999 32.5 1240 40300.0
40000 49999 45.0 714 32130.0
50000 59999 55.0 642 35310.0
60000 79999 70.0 1361 95270.0
80000 99999 90.0 1270 114300.0
100000 149999 125.0 2708 338500.0
150000 199999 175.0 1633 285775.0
200000 299999 250.0 1242 310500.0
300000 499999 400.0 870 348000.0
500000 999999 750.0 367 275250.0
1000000 1999999 1500.0 125 187500.0
2000000 4000000 3000.0 41 123000.0
Total 16933 2225722.5

Mean = 2225722.5 = 131.443


16933
Measures of Central Tendency:
The Median

In an ordered array, the median is the middle


number (50% above, 50% below)

0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10

Median = 3 Median = 3

Not affected by extreme values

Chap 3-9
Measures of Central Tendency:
Locating the Median

The location of the median when the values are in numerical order
(smallest to largest):

n 1
Median position position in the ordered data
2
If the number of values is odd, the median is the middle number

If the number of values is even, the median is the average of the


two middle numbers

Note that n 1 is not the value of the median, only the position of
2
the median in the ranked data

Chap 3-10
Median of Wealth

Median is 76 907

There are 16933 people


16933 / 2 = 8466
Person 8466 is shown by a yellow line.
This person has 76 907 of marketable wealth.
Median of Wealth
Jan 12 17 10
Feb 17 Cumulative
11 21 Frequency Wealth Distribution,
Mar 22 29 14
Apr 14 10 17 UK,2001
May 12 17 10
Jun 19 15 20

18000
16000
14000
12000
CF (000)

10000
8000
6000
4000
2000
0
0 50000 100000 150000 200000 250000 300000
Wealth
Measures of Central Tendency:
The Mode

Value that occurs most often


Not affected by extreme values
Used for either numerical or categorical
(nominal) data
There may may be no mode
There may be several modes

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 0 1 2 3 4 5 6

No Mode
Mode = 9
Chap 3-13
Measures of Central Tendency:
Review Example

House Prices: Mean: (3,000,000/5)


2,000,000 = 600,000
500,000
300,000
Median: middle value of ranked
100,000 data
100,000 = 300,000
Sum 3,000,000 Mode: most frequent value
= 100,000

Chap 3-14
Thinking Challenge

Youre a financial analyst for


Prudential-Bache Securities.
You have collected the
following closing stock prices
of new stock issues: 17, 16,
21, 18, 13, 16, 12, 11.
Describe the stock prices
in terms of central
tendency.
Central Tendency Solution*

Mean
n

Xi X1 X 2 X 8
i 1
X
n 8
17 16 21 18 13 16 12 11

8
15 .5
Central Tendency Solution*

Median
Remember to order the data first
Ordered: 11 12 13 16 16 17 18 21
Position: 1 2 3 4 5 6 7 8

n 1 8 1
Positioning Point 4.5
2 2
16 16
Median 16
2
Central Tendency Solution*

Mode
Raw Data: 17 16 21 18 13 16 12 11

Mode = 16
Measures of Central Tendency:
Which Measure to Choose?

The mean is generally used, unless extreme


values (outliers) exist.
The median is often used, since the median is
not sensitive to extreme values. For example,
median home prices may be reported for a
region; it is less sensitive to outliers.
In some situations it makes sense to report both
the mean and the median.

Chap 3-19
Measure of Central Tendency For The Rate Of Change
Of A Variable Over Time:
The Geometric Mean & The Geometric Rate of Return

Geometric mean
Used to measure the rate of change of a variable over
time

X G ( X1 X 2 X n ) 1/ n

Geometric mean rate of return


Measures the status of an investment over time

RG [(1 R1 ) (1 R2 ) (1 Rn )]1/ n 1

Where Ri is the rate of return in time period i

Chap 3-20
The Geometric Mean Rate of
Return: Example

An investment of $100,000 declined to $50,000 at the end of


year one and rebounded to $100,000 at end of year two:

X1 $100,000 X2 $50,000 X3 $100,000

50% decrease 100% increase

The overall two-year return is zero, since it started and ended


at the same level.

Chap 3-21
The Geometric Mean Rate of
Return: Example
(continued)

Use the 1-year returns to compute the arithmetic mean


and the geometric mean:

Arithmetic
(.5) (1) Misleading result
mean rate X .25 25%
2
of return:

Geometric R G [(1 R1 ) (1 R2 ) (1 Rn )]1 / n 1 More


mean rate of [(1 (.5)) (1 (1))]1 / 2 1 representative
return:
[(. 50) (2)]1 / 2 1 11 / 2 1 0% result

Chap 3-22
Pitfalls in Numerical
Descriptive Measures

Data analysis is objective


Should report the summary measures that best
describe and communicate the important aspects of
the data set

Data interpretation is subjective


Should be done in fair, neutral and clear manner

Chap 3-23
Ethical Considerations

Numerical descriptive measures:

Should document both good and bad results


Should be presented in a fair, objective and
neutral manner
Should not use inappropriate summary
measures to distort facts

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc.. Chap 3-24


Measures of Central Tendency:
Summary

Central Tendency

Arithmetic Median Mode Geometric Mean


Mean
n

X i
XG ( X1 X2 Xn )1/ n

X i 1
n Middle value Most Rate of
in the ordered frequently change of
array observed a variable
value over time

Chap 3-25

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