Chapter 3 – Numerical Descriptive Measures
Central Location - refers to how numerical data tend to Since there are 8 salaries, the median is the average of
cluster around some middle or central value. Measures the observations in the 4th and 5th positions.
of central location attempt to find a typical or central
Median is (90k + 100k)/ 2 = $95,000
value that describes the data.
Four salaries are less than $95,000 and four salaries are
Arithmetic Mean - is the primary measure of central
greater than $95,000.
location. Also referred to as the Mean or Average.
Compared to the mean of $147,500, the median better
Example: Salaries of employees at Acetech
reflects the typical salary.
Mode – Is the observation that occurs most frequently.
It is a less useful measure of centrality when there are
more than three modes.
There can be one or more modes, or even no mode.
One mode: unimodal
Two modes: bimodal
Example: modal salary for employees at Acetech
Mean = $147,500
$40,000 is earned by two employees, every other salary
Since these are all employees, calculate the population
occurs just once. $40,000 is the mode.
mean. This value does not reflect the typical salary; 6 of
the 8 employees earn less than the mean. Most employees earn considerably more than this. Just
because an observation occurs with the most frequency
Since the mean can be affected by outliers, we often
does not guarantee that it best reflects the center of the
calculate the median.
variable.
Median – Is the middle value of a variable.
To summarize a categorical variable, the mode is the
It divides the data in half only meaningful measure of central location.
An equal number of observations lie above and Example: sizes of women’s sweatshirts
below the median
The one middle value if n (or N) is odd
The average of the two middle values if n (or N)
is even The sizes are S, M, or L.
S and M appear 2 times each, L appears 5 times.
The median is especially useful when outliers are The modal size is L.
present. The mean and median are both typically
published. If they differ, then the variable likely contains
outliers.
Example: the median salary of Acetech employees
Arrange the data in ascending order.
The arithmetic mean
Is additive.
Ignores the effects of compounding
Suitable for analyzing a one-year investment
The geometric mean
Is a multiplicative average.
Smaller than the arithmetic mean
Less sensitive to outliers
Relevant measure when evaluating investment
returns over several years
Calculating the average growth rates.
Example: Given an initial investment of $1,000 over 2
years.
Example: a student scores 60 on Exam 1, 70 on Exam 2,
and 80 on Exam 3. What is the student’s average score
for the course if Exams 1, 2, and 3 are worth 25%, 25%,
and 50% of the grade, respectively?
Let 𝑤_1=0.25, 𝑤_2=0.25, 𝑤_3=0.50 Arithmetic Mean = 𝑥 ̅=(10+(−10))/2= 0%
The average score is the weighted mean. Geo Mean =√(2&(1+0.10)(1+(−0.10)) )−1=−0.005
or −0.5%
𝑥 ̅=0.25(60)+0.25(70)+0.50(80)=75.50 We can interpret the geometric return as the
annualized return from the two year-period.
Note the unweighted mean is only 70.
A distribution is symmetric if one side of the histogram
is a mirror image of the other.
For a symmetric and unimodal distribution, the mean, Calculating average growth rate using geo mean
median, and mode are equal.
Example: sales for multinational corporation
Positively skewed: mean is usually greater than
the median
Negatively skewed: the mean is usually less
than the median
𝐺_𝑔=√(5−1&16,915/13,322)−1= 0.0615 𝑜𝑟 6.15%
Skewness coefficient - Is a measure of skewness.
The growth rate after five years is 6.15%.
Zero: observations are evenly distributed on
both sides of the mean (symmetric)
Positive: extreme observations in the right tail,
pulling the mean up relative to the median
Negative: extreme observations in the left tail,
pulling the mean down relative the median
