Statistics for

Business and Economics

8th Global Edition

Chapter 2

Using Numerical Measures to

Describe Data
Copyright © 2013 Pearson Education Ch. 2-1
 Chapter Goals
After completing this chapter, you should be able to:
◼ Compute and interpret the mean, median, and mode for a
set of data
◼ Find the range, variance, standard deviation, and
coefficient of variation and know what these values mean
◼ Apply the empirical rule to describe the variation of
population values around the mean
◼ Explain the weighted mean and when to use it
◼ Explain how a least squares regression line estimates a
linear relationship between two variables

Copyright © 2013 Pearson Education Ch. 2-2

 Chapter Topics

◼ Measures of central tendency, variation, and

shape
◼ Mean, median, mode, geometric mean
◼ Quartiles
◼ Range, interquartile range, variance and standard
deviation, coefficient of variation
◼ Symmetric and skewed distributions
◼ Population summary measures
◼ Mean, variance, and standard deviation
◼ The empirical rule and Chebyshev’s Theorem

Copyright © 2013 Pearson Education Ch. 2-3

 Chapter Topics
(continued)

◼ Five number summary and box-and-whisker

plots
◼ Covariance and coefficient of correlation
◼ Pitfalls in numerical descriptive measures and
ethical considerations

Copyright © 2013 Pearson Education Ch. 2-4

 Describing Data Numerically
Describing Data Numerically

Central Tendency Variation

Arithmetic Mean Range

Median Interquartile Range

Mode Variance

Standard Deviation

Coefficient of Variation

Copyright © 2013 Pearson Education Ch. 2-5

 2.1
Measures of Central Tendency
Overview
Central Tendency

Mean Median Mode

x i
x= i=1
n
Arithmetic Midpoint of Most frequently
average ranked values observed value
(if one exists)
Copyright © 2013 Pearson Education Ch. 2-6
 Arithmetic Mean
◼ The arithmetic mean (mean) is the most
common measure of central tendency
◼ For a population of N values:
N

xx1 + x 2 +  + x N
i Population
μ= =
i=1
values
N N
Population size

◼ For a sample of size n:

n

x i
x1 + x 2 +  + x n Observed
x= i=1
= values
n n
Sample size
Copyright © 2013 Pearson Education Ch. 2-7
 Arithmetic 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

Copyright © 2013 Pearson Education Ch. 2-8

 Median
◼ In an ordered list, 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

Copyright © 2013 Pearson Education Ch. 2-9

 Finding the Median

◼ The location of the median:

th
 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

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

Copyright © 2013 Pearson Education Ch. 2-10

 Mode
◼ A measure of central tendency
◼ Value that occurs most often
◼ Not affected by extreme values
◼ Used for either numerical or categorical 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
Copyright © 2013 Pearson Education Ch. 2-11
 Review Example

◼ Five houses on a hill by the beach

$2,000 K
House Prices:

$2,000,000
500,000 $500 K
300,000 $300 K
100,000
100,000

$100 K

$100 K

Copyright © 2013 Pearson Education Ch. 2-12

 Review Example:
Summary Statistics

House Prices:
◼ Mean: ($3,000,000/5)
$2,000,000 = $600,000
500,000
300,000
100,000
100,000 ◼ Median: middle value of ranked data
Sum 3,000,000
= $300,000

◼ Mode: most frequent value

= $100,000

Copyright © 2013 Pearson Education Ch. 2-13

 Which measure of location
is the “best”?

One factor that influences our choice is the type

of data, categorical or numerical.

Categorical data are best described by the

median or the mode, not the mean.

Copyright © 2013 Pearson Education Ch. 2-14

 Which measure of location
is the “best”?

◼ Mean is generally used, unless extreme

values (outliers) exist . . .
◼ Then median is often used, since the median
is not sensitive to extreme values.
◼ Example: Median home prices may be reported for
a region – less sensitive to outliers

Copyright © 2013 Pearson Education Ch. 2-15

 Shape of a Distribution

◼ Describes how data are distributed

◼ Measures of shape
◼ Symmetric or skewed

Left-Skewed Symmetric Right-Skewed

Mean < Median Mean = Median Median < Mean

Copyright © 2013 Pearson Education Ch. 2-16

 n

1  i
( x − x ) 3

Skewness = i =1
n s3

Copyright © 2013 Pearson Education Ch. 2-17

 Example 2.3 Grade Point Averages

Copyright © 2013 Pearson Education Ch. 2-18

 Geometric Mean

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

x g = n (x1  x 2  xn ) = (x1  x 2  xn )1/n

◼ Geometric mean rate of return
◼ Measures the status of an investment over time

rg = (x1  x 2  ...  xn )1/n − 1

◼ Where xi is the rate of return in time period i
Copyright © 2013 Pearson Education Ch. 2-19
 Example

An investment of $100,000 rose to $150,000 at the

end of year one and increased to $180,000 at end
of year two:

X1 = $100,000 X2 = $150,000 X3 = $180,000

50% increase 20% increase

What is the mean percentage return over time?

Copyright © 2013 Pearson Education Ch. 2-20

 Example
(continued)

Use the 1-year returns to compute the arithmetic

mean and the geometric mean:

Arithmetic (50%) + (20%)

mean rate X= = 35% Misleading result
2
of return:

rg = (x1  x 2 )1/n − 1
Geometric
= [(1.50)  (1.20)]1/2 − 1
mean rate
of return: = (1.8)1/2 − 1 = 1.3416 − 1 = 34.16%
Accurate
result
Copyright © 2013 Pearson Education Ch. 2-21
 Example 2.4 Annual Growth Rate (Geometric Mean)

Find the annual growth rate if sales have grown 25% over 5
years.

Copyright © 2013 Pearson Education Ch. 2-22

 Annual growth rate, r, that would yield 25% over 5 years
must satisfy this equation:

Copyright © 2013 Pearson Education Ch. 2-23

 Percentiles and Quartiles

◼ Percentiles and Quartiles indicate the position of a

value relative to the entire set of data

◼ Generally used to describe large data sets

◼ Example: An IQ score at the 90th percentile means that 10%

of the population has a higher IQ score and 90% have a lower
IQ score.

Copyright © 2013 Pearson Education Ch. 2-24

 Percentiles and Quartiles

◼ To find percentiles and quartiles, data must first be arranged

in order from the smallest to the largest values.

◼ The Pth percentile is a value such that approximately P % of

the observations are at or below that number. Percentiles
separate large ordered data sets into 100ths. The 50th
percentile is the median. The Pth percentile is found as
follows:

Pth percentile = value located in the (P/100)(n + 1)th

ordered position

Copyright © 2013 Pearson Education Ch. 2-25

 Quartiles
◼ Quartiles split the ranked data into 4 segments with
an equal number of values per segment (note that
the widths of the segments may be different)

25% 25% 25% 25%

Q1 Q2 Q3
◼ The first quartile, Q1, is the value for which 25% of the
observations are smaller and 75% are larger
◼ Q2 is the same as the median (50% are smaller, 50% are
larger)
◼ Only 25% of the observations are greater than the third
quartile

Copyright © 2013 Pearson Education Ch. 2-26

 Quartile Formulas

Find a quartile by determining the value in the

appropriate position in the ranked data, where

First quartile position: Q1 = 0.25(n+1)

Second quartile position: Q2 = 0.50(n+1)

(the median position)

Third quartile position: Q3 = 0.75(n+1)

where n is the number of observed values

Copyright © 2013 Pearson Education Ch. 2-27

 Quartiles

◼ Example: Find the first quartile

Sample Ranked Data: 11 12 13 16 16 17 18 21 22

(n = 9)
Q1 = is in the 0.25(9+1) = 2.5 position of the ranked data
so use the value half way between the 2nd and 3rd values,

so Q1 = 12.5

Copyright © 2013 Pearson Education Ch. 2-28

 Five-Number Summary

The five-number summary refers to five descriptive

measures:
minimum
first quartile
median
third quartile
maximum

minimum < Q1 < median < Q3 < maximum

Copyright © 2013 Pearson Education Ch. 2-29

 Basic Exercises

2.1 A random sample of 5 weeks showed that a cruise agency

received the following number of weekly specials to the Caribbean:

20 73 75 80 82

a. Compute the mean, median, and mode.

b. Which measure of central tendency best describes

the data?

Copyright © 2013 Pearson Education Ch. 2-30

Copyright © 2013 Pearson Education Ch. 2-31
 A department-store manager is interested in the number
of complaints received by the customer-service department about
the quality of electrical products sold by the store. Records over a
5-week period show the following number of complaints for each
week:

13 15 8 16 8

a. Compute the mean number of weekly complaints.

b Calculate the median number of weekly complaints.
c. Find the mode.

Copyright © 2013 Pearson Education Ch. 2-32

Copyright © 2013 Pearson Education Ch. 2-33
 2.2 During the last 3 years Consolidated Oil Company
expanded its gasoline stations into convenience food stores
(CFSs) in an attempt to increase total sales revenue. The
daily sales (in hundreds of dollars) from a random sample of
10 weekdays from one of its stores are:

6 8 10 12 14 9 11 7 13 11

a. Find the five-number summary.

Copyright © 2013 Pearson Education Ch. 2-34

Copyright © 2013 Pearson Education Ch. 2-35
Copyright © 2013 Pearson Education Ch. 2-36
 2.2
Measures of Variability

Variation

Range Interquartile Variance Standard Coefficient of

Range Deviation Variation

◼ Measures of variation give

information on the spread
or variability of the data
values.

Same center,
different variation
Copyright © 2013 Pearson Education Ch. 2-37
 Sample A: 1 2 1 36

Sample B: 8 9 10 13

Although the mean is 10 for both samples, clearly the

data in sample A are farther from 10 than are the data
in sample B.

We need descriptive numbers to measure this spread.

Copyright © 2013 Pearson Education Ch. 2-38

 Range

◼ Simplest measure of variation

◼ Difference between the largest and the smallest
observations:

Range = Xlargest – Xsmallest

Example:

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

Range = 14 - 1 = 13

Copyright © 2013 Pearson Education Ch. 2-39

 Disadvantages of the Range
◼ Ignores the way in which data are distributed

7 8 9 10 11 12 7 8 9 10 11 12
Range = 12 - 7 = 5 Range = 12 - 7 = 5

◼ Sensitive to outliers
1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,5
Range = 5 - 1 = 4

1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,120
Range = 120 - 1 = 119

Copyright © 2013 Pearson Education Ch. 2-40

 Interquartile Range

◼ Can eliminate some outlier problems by using

the interquartile range

◼ Eliminate high- and low-valued observations

and calculate the range of the middle 50% of
the data

◼ Interquartile range = 3rd quartile – 1st quartile

IQR = Q3 – Q1

Copyright © 2013 Pearson Education Ch. 2-41

 Interquartile Range

◼ The interquartile range (IQR) measures the

spread in the middle 50% of the data

◼ Defined as the difference between the

observation at the third quartile and the
observation at the first quartile

IQR = Q3 - Q1

Copyright © 2013 Pearson Education Ch. 2-42

 Box-and-Whisker Plot

◼ A box-and-whisker plot is a graph that describes the

shape of a distribution
◼ Created from the five-number summary: the
minimum value, Q1, the median, Q3, and the
maximum
◼ The inner box shows the range from Q 1 to Q3, with a
line drawn at the median
◼ Two “whiskers” extend from the box. One whisker is
the line from Q1 to the minimum, the other is the line
from Q3 to the maximum value

Copyright © 2013 Pearson Education Ch. 2-43

 Box-and-Whisker Plot
The plot can be oriented horizontally or vertically

Example:
Median X
X Q1 Q3 maximum
minimum (Q2)
25% 25% 25% 25%

12 30 45 57 70

Copyright © 2013 Pearson Education Ch. 2-44

 Population Variance

◼ Average of squared deviations of values from

the mean
N
◼ Population variance:
 (x − μ)
i
2

σ =2 i=1
N
Where μ = population mean
N = population size
xi = ith value of the variable x
Copyright © 2013 Pearson Education Ch. 2-45
 Sample Variance

◼ Average (approximately) of squared deviations

of values from the mean
n
◼ Sample variance:
 (x − x)i
2

s =
2 i=1
n -1
Where X = arithmetic mean
n = sample size
Xi = ith value of the variable X
Copyright © 2013 Pearson Education Ch. 2-46
 Population Standard Deviation

◼ Most commonly used measure of variation

◼ Shows variation about the mean
◼ Has the same units as the original data

◼ Population standard deviation:

 i
(x − μ) 2

σ= i=1
N
Copyright © 2013 Pearson Education Ch. 2-47
 Sample Standard Deviation

◼ Most commonly used measure of variation

◼ Shows variation about the mean
◼ Has the same units as the original data

 i
◼ Sample standard deviation:
(x − x) 2

S= i=1
n -1

Copyright © 2013 Pearson Education Ch. 2-48

 Calculation Example:
Sample Standard Deviation
Sample
Data (xi) : 10 12 14 15 17 18 18 24
n=8 Mean = x = 16

(10 − X)2 + (12 − x)2 + (14 − x)2 +  + (24 − x)2

s=
n −1

(10 − 16)2 + (12 − 16)2 + (14 − 16)2 +  + (24 − 16)2

=
8 −1

130 A measure of the “average”

= = 4.3095
7 scatter around the mean
Copyright © 2013 Pearson Education Ch. 2-49
 Measuring variation

Small standard deviation

Large standard deviation

Copyright © 2013 Pearson Education Ch. 2-50

 Comparing Standard Deviations
Mean = 15.5 for each data set

11 12 13 14 15 16 17 18 19 20 21
s = 3.338
(compare to the two
Data A cases below)

11 12 13 14 15 16 17 18 19 20 21
s = 0.926
(values are concentrated
Data B near the mean)

s = 4.570
11 12 13 14 15 16 17 18 19 20 21 (values are dispersed far
Data C from the mean)

Copyright © 2013 Pearson Education Ch. 2-51

 EX: David and Kelly are considering two investment
alternatives, asset A and asset B. They are not sure which of
these two single assets is better, and they ask Sheila
Newton, a financial planner, for some assistance.

Copyright © 2013 Pearson Education Ch. 2-52

 Advantages of Variance and
Standard Deviation

◼ Each value in the data set is used in the

calculation

◼ Values far from the mean are given extra

weight
(because deviations from the mean are squared)

Copyright © 2013 Pearson Education Ch. 2-53

 Using Microsoft Excel

◼ Descriptive Statistics can be obtained

from Microsoft® Excel
◼ Select:
data / data analysis / descriptive statistics

◼ Enter details in dialog box

Copyright © 2013 Pearson Education Ch. 2-54

 Using Excel

◼ Select data / data analysis / descriptive statistics

Copyright © 2013 Pearson Education Ch. 2-55

 Using Excel

◼ Enter input
range details

◼ Check box for

summary
statistics

◼ Click OK
Copyright © 2013 Pearson Education Ch. 2-56
 Excel output
Microsoft Excel
descriptive statistics output,
using the house price data:
House Prices:

$2,000,000
500,000
300,000
100,000
100,000

Copyright © 2013 Pearson Education Ch. 2-57

 Coefficient of Variation
◼ Measures relative variation
◼ Always in percentage (%)
◼ Shows variation relative to mean
◼ Can be used to compare two or more sets of
data measured in different units
Population coefficient of Sample coefficient of
variation: variation:
σ  s
CV =   100% CV =    100%
μ  x 

Copyright © 2013 Pearson Education Ch. 2-58

 Comparing Coefficient
of Variation
◼ Stock A:
◼ Average price last year = $50

◼ Standard deviation = $5

s  $5
CVA =   100% = 100% = 10%
x  $50 Both stocks
◼ Stock B: have the same
standard
◼ Average price last year = $100 deviation, but
stock B is less
◼ Standard deviation = $5 variable relative
to its price
s  $5
CVB =   100% = 100% = 5%
x  $100
Copyright © 2013 Pearson Education Ch. 2-59
 Basic Exercises

1) Compute the variance and standard deviation of the

following sample data:

6 8 7 10 3 5 9 8

Copyright © 2013 Pearson Education Ch. 2-60

 2) Calculate the coefficient of variation for the following
sample data:

10 8 11 7 9

Copyright © 2013 Pearson Education Ch. 2-61

 3) The ages of a random sample of people who attended
a recent soccer match are as follows:

23 35 14 37 38 15 45
12 40 27 13 18 19 23
37 20 29 49 40 65 53
18 17 23 27 29 31 42
35 38 22 20 15 17 21

a) Find the interquartile range.

Copyright © 2013 Pearson Education Ch. 2-62

Copyright © 2013 Pearson Education Ch. 2-63
 Chebychev’s Theorem
◼ For any population with mean μ and
standard deviation σ , and k > 1 , the
percentage of observations that fall within
the interval
(   k )
Is at least

100[1− (1/k )]%

2

where k is the number of standard deviations.

Copyright © 2013 Pearson Education Ch. 2-64
 Chebychev’s Theorem
(continued)

◼ Regardless of how the data are distributed, at

least (1 - 1/k2) of the values will fall within k
standard deviations of the mean (for k > 1)
◼ Examples:

At least within
(1 - 1/1.52) = 55.6% ……... k = 1.5 (μ ± 1.5σ)
(1 - 1/22) = 75% …........... k = 2 (μ ± 2σ)
(1 - 1/32) = 89% …….…... k = 3 (μ ± 3σ)

Copyright © 2013 Pearson Education Ch. 2-65

 The Empirical Rule

◼ If the data distribution is bell-shaped, then

the interval:
◼ μ  1σ contains about 68% of the values in
the population or the sample

68%

μ
μ  1σ
Copyright © 2013 Pearson Education Ch. 2-66
 The Empirical Rule
(continued)
◼ μ  2σ contains about 95% of the values in
the population or the sample
◼ μ  3σ contains almost all (about 99.7%) of
the values in the population or the sample

95% 99.7%

μ  2σ μ  3σ

Copyright © 2013 Pearson Education Ch. 2-67

Copyright © 2013 Pearson Education Ch. 2-68
 z-Score

A z-score shows the position of a value

relative to the mean of the distribution.
◼ indicates the number of standard deviations a
value is from the mean.
◼ A z-score greater than zero indicates that the value is
greater than the mean
◼ a z-score less than zero indicates that the value is
less than the mean
◼ a z-score of zero indicates that the value is equal to
the mean.
Copyright © 2013 Pearson Education Ch. 2-69
 z-Score
(continued)

◼ If the data set is the entire population of data

and the population mean, µ, and the population
standard deviation, σ, are known, then for each
value, xi, the z-score associated with xi is

xi - μ
z=
σ

Copyright © 2013 Pearson Education Ch. 2-70

 z-Score
(continued)
◼ If intelligence is measured for a population
using an IQ score, where the mean IQ score
is 100 and the standard deviation is 15, what
is the z-score for an IQ of 121?

x i - μ 121 - 100
z= = = 1.4
σ 15
A score of 121 is 1.4 standard
deviations above the mean.

Copyright © 2013 Pearson Education Ch. 2-71

 Example: College Entrance Exams (z-scores)

Consider a very large number of students taking a college

entrance exam such as the SAT. And suppose the mean
score on the mathematics section of the SAT is 570 with a
standard deviation of 40.

a. Find the z-score for a student who scored 600.

b. A student is told that his z-score on this test is -1.5. What

was his actual SAT math score?

Copyright © 2013 Pearson Education Ch. 2-72

Copyright © 2013 Pearson Education Ch. 2-73
 4) A random sample of data has a mean of 75 and a variance
of 25.

a. Use Chebyshev’s theorem to determine the percent of

observations between 65 and 85.

b. If the data are mounded, use the empirical rule to find the
approximate percent of observations between 65 and 85.

Copyright © 2013 Pearson Education Ch. 2-74

Copyright © 2013 Pearson Education Ch. 2-75
 5) If the mean of a population is 250 and its standard
deviation is 20, approximately what proportion of
observations is in the interval between each pair of values?

a. 190 and 310

b. 210 and 290

Copyright © 2013 Pearson Education Ch. 2-76

Copyright © 2013 Pearson Education Ch. 2-77
 6) A set of data is mounded, with a mean of 450 and a
variance of 625. Approximately what proportion of the
observations is

a. greater than 425?

b. less than 500?
c. greater than 525?

Copyright © 2013 Pearson Education Ch. 2-78

Copyright © 2013 Pearson Education Ch. 2-79
Copyright © 2013 Pearson Education Ch. 2-80
Copyright © 2013 Pearson Education Ch. 2-81
 2.3
Weighted Mean
and Measures of Grouped Data

◼ The weighted mean of a set of data is

n

w x i i
w 1x1 + w 2 x 2 +  + w n x n
x= i=1
=
n n
◼ Where wi is the weight of the ith observation
and n = w i

◼ Use when data is already grouped into n classes, with

wi values in the ith class

Copyright © 2013 Pearson Education Ch. 2-82

 Example 2.16 Grade Point Average (Weighted Mean)

Suppose that a student who completed 15 credit hours during

his first semester of college received one A, one B, one C, and
one D. Suppose that a value of 4 is used for an A, 3 for a B, 2
for a C, 1 for a D, and 0 for an F.

Calculate the student’s semester GPA.

Copyright © 2013 Pearson Education Ch. 2-83

Copyright © 2013 Pearson Education Ch. 2-84
 Approximations for Grouped Data
Suppose data are grouped into K classes, with
frequencies f 1, f 2, . . ., f K, and the midpoints of the
classes are m1, m2, . . ., mK

◼ For a sample of n observations, the mean is

approximated in the following manner

 fimi where
K
n =  fi
x= i=1 i=1

Copyright © 2013 Pearson Education Ch. 2-85

 Approximations for Grouped Data
Suppose data are grouped into K classes, with
frequencies f 1, f 2, . . ., f K, and the midpoints of the
classes are m1, m2, . . ., mK

◼ For a sample of n observations, the variance is

approximated in the following manner

i i
f (m − x) 2

s2 = i=1
n −1

Copyright © 2013 Pearson Education Ch. 2-86

 Basic Exercises

• Consider the following sample of five values and corresponding

weights:

a. Calculate the arithmetic mean of the xi values without weights.

b. Calculate the weighted mean of the xi values.

Copyright © 2013 Pearson Education Ch. 2-87

Copyright © 2013 Pearson Education Ch. 2-88
 • Consider the following frequency distribution for a sample of
40 observations:

a. Calculate the sample mean.

b. Calculate the sample variance and sample standard

deviation.
Copyright © 2013 Pearson Education Ch. 2-89
Copyright © 2013 Pearson Education Ch. 2-90
Calculate the sample variance and sample standard deviation

Class
mi fi f i mi (mi − x ) ( mi − x ) 2 f i (mi − x ) 2
0-4 2 5 10 -10.625 112.8906 564.4531
5-9 7 8 56 -5.625 31.64063 253.125
10-14 12 11 132 -0.625 0.390625 4.296875
15-19 17 9 153 4.375 19.14063 172.2656
20-24 22 7 154 9.375 87.89063 615.2344
40 505 1609.375
K

 fi ( mi − xi )
2

1609.375
s =
2 i =1
= = 41.266
n −1 39
s = s 2 = 41.266 = 6.424

̅x =12,625
Copyright © 2013 Pearson Education Ch. 2-91
 2.4
Measures of Relationships
Between Variables

Two measures of the relationship between

variable are

◼ Covariance
◼ a measure of the direction of a linear relationship
between two variables

◼ Correlation Coefficient
◼ a measure of both the direction and the strength of a
linear relationship between two variables

Copyright © 2013 Pearson Education Ch. 2-92

 Covariance
◼ The population covariance:
N

 (x −  i x )(y i −  y )
Cov (x , y) =  xy = i=1
N
◼ The sample covariance:

 (x − x)(y i i − y)
Cov (x , y) = s xy = i=1
n −1

Copyright © 2013 Pearson Education Ch. 2-93

 Interpreting Covariance

◼ Covariance between two variables:

Cov(x,y) > 0 x and y tend to move in the same direction

Cov(x,y) < 0 x and y tend to move in opposite directions

Cov(x,y) = 0 x and y are independent

Copyright © 2013 Pearson Education Ch. 2-94

 Coefficient of Correlation
◼ Measures the relative strength of the linear relationship
between two variables

◼ Population correlation coefficient:

Only concerned with the strength
Cov (x , y)
ρ= of the relationship. No causal effect
σXσY is implied
◼ Sample correlation coefficient:
Cov (x , y) A useful rule to remember is
r=
sX sY that a relationship exists if
2
r 
Copyright © 2013 Pearson Education
n Ch. 2-95
 Features of
Correlation Coefficient, r

◼ Unit free
◼ Ranges between –1 and 1
◼ The closer to –1, the stronger the negative linear
relationship
◼ The closer to 1, the stronger the positive linear
relationship
◼ The closer to 0, the weaker any positive linear
relationship

Copyright © 2013 Pearson Education Ch. 2-96

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 2-97
 Scatter Plots of Data with Various
Correlation Coefficients
Y Y Y

X X X
r = -1 r = -.6 r=0
Y
Y Y

X X X
r = +1 r = +.3 r=0
Copyright © 2013 Pearson Education Ch. 2-98
 Figure 2.5 Retail Sales by Quarter

Copyright © 2013 Pearson Education Ch. 2-99

 Basic Exercises

• Following is a random sample of seven (x, y) pairs of

data points:

(11, 52) (13, 72) (14, 62) (15, 82) (17, 92) (13, 62) (15, 72)

a. Compute the covariance.

b. Compute the correlation coefficient

Copyright © 2013 Pearson Education Ch. 2-100

 Using Excel to Find
the Correlation Coefficient
◼ Select Data / Data Analysis

◼ Choose Correlation from the selection menu

◼ Click OK . . .

Copyright © 2013 Pearson Education Ch. 2-101

 Using Excel to Find
the Correlation Coefficient
(continued)

◼ Input data range and select

appropriate options
◼ Click OK to get output

Copyright © 2013 Pearson Education Ch. 2-102

 Interpreting the Result

Scatter Plot of Test Scores

◼ r = .733 100

95

Test #2 Score
◼ There is a relatively 90

85

strong positive linear 80

relationship between 75

test score #1 70
70 75 80 85 90 95 100

Test #1 Score
and test score #2

◼ Students who scored high on the first test tended

to score high on second test

Copyright © 2013 Pearson Education Ch. 2-103