Tag: Forecasting Techniques

The range is a measure of dispersion that represents the difference between the highest and lowest values in a dataset. It provides a simple way to understand the spread of data. While easy to calculate, the range is sensitive to outliers and does not provide information about the distribution of values between the extremes.

Range of a distribution gives a measure of the width (or the spread) of the data values of the corresponding random variable. For example, if there are two random variables X and Y such that X corresponds to the age of human beings and Y corresponds to the age of turtles, we know from our general knowledge that the variable corresponding to the age of turtles should be larger.

Since the average age of humans is 50-60 years, while that of turtles is about 150-200 years; the values taken by the random variable Y are indeed spread out from 0 to at least 250 and above; while those of X will have a smaller range. Thus, qualitatively you’ve already understood what the Range of a distribution means. The mathematical formula for the same is given as:

Range = L – S

where

L: The Largets/maximum value attained by the random variable under consideration

S: The smallest/minimum value.

Properties

• The Range of a given distribution has the same units as the data points.
• If a random variable is transformed into a new random variable by a change of scale and a shift of origin as:

Y = aX + b

where

Y: the new random variable

X: the original random variable

a,b: constants.

Then the ranges of X and Y can be related as:

R_Y = |a|R_X

Clearly, the shift in origin doesn’t affect the shape of the distribution, and therefore its spread (or the width) remains unchanged. Only the scaling factor is important.

• For a grouped class distribution, the Range is defined as the difference between the two extreme class boundaries.
• A better measure of the spread of a distribution is the Coefficient of Range, given by:

Coefficient of Range (expressed as a percentage) = L – SL + S × 100

Clearly, we need to take the ratio between the Range and the total (combined) extent of the distribution. Besides, since it is a ratio, it is dimensionless, and can, therefore, one can use it to compare the spreads of two or more different distributions as well.

• The range is an absolute measure of Dispersion of a distribution while the Coefficient of Range is a relative measure of dispersion.

Due to the consideration of only the end-points of a distribution, the Range never gives us any information about the shape of the distribution curve between the extreme points. Thus, we must move on to better measures of dispersion. One such quantity is Mean Deviation which is we are going to discuss now.

Interquartile range (IQR)

The interquartile range is the middle half of the data. To visualize it, think about the median value that splits the dataset in half. Similarly, you can divide the data into quarters. Statisticians refer to these quarters as quartiles and denote them from low to high as Q1, Q2, Q3, and Q4. The lowest quartile (Q1) contains the quarter of the dataset with the smallest values. The upper quartile (Q4) contains the quarter of the dataset with the highest values. The interquartile range is the middle half of the data that is in between the upper and lower quartiles. In other words, the interquartile range includes the 50% of data points that fall in Q2 and

The IQR is the red area in the graph below.

The interquartile range is a robust measure of variability in a similar manner that the median is a robust measure of central tendency. Neither measure is influenced dramatically by outliers because they don’t depend on every value. Additionally, the interquartile range is excellent for skewed distributions, just like the median. As you’ll learn, when you have a normal distribution, the standard deviation tells you the percentage of observations that fall specific distances from the mean. However, this doesn’t work for skewed distributions, and the IQR is a great alternative.

I’ve divided the dataset below into quartiles. The interquartile range (IQR) extends from the low end of Q2 to the upper limit of Q3. For this dataset, the range is 21 – 39.

Karl Pearson Coefficient of Correlation (also called the Pearson correlation coefficient or Pearson’s r) is a measure of the strength and direction of the linear relationship between two variables. It ranges from -1 to +1, where +1 indicates a perfect positive linear relationship, -1 indicates a perfect negative linear relationship, and 0 indicates no linear relationship. The formula for Pearson’s r is calculated by dividing the covariance of the two variables by the product of their standard deviations. It is widely used in statistics to analyze the degree of correlation between paired data.

The following are the main properties of correlation.

1. Coefficient of Correlation lies between -1 and +1:

The coefficient of correlation cannot take value less than -1 or more than one +1. Symbolically,

-1<=r<= + 1 or | r | <1.

2. Coefficients of Correlation are independent of Change of Origin:

This property reveals that if we subtract any constant from all the values of X and Y, it will not affect the coefficient of correlation.

3. Coefficients of Correlation possess the property of symmetry:

The degree of relationship between two variables is symmetric as shown below:

4. Coefficient of Correlation is independent of Change of Scale:

This property reveals that if we divide or multiply all the values of X and Y, it will not affect the coefficient of correlation.

5. Co-efficient of correlation measures only linear correlation between X and Y.
6. If two variables X and Y are independent, coefficient of correlation between them will be zero.

Karl Pearson’s Coefficient of Correlation is widely used mathematical method wherein the numerical expression is used to calculate the degree and direction of the relationship between linear related variables.

Pearson’s method, popularly known as a Pearsonian Coefficient of Correlation, is the most extensively used quantitative methods in practice. The coefficient of correlation is denoted by “r”.

If the relationship between two variables X and Y is to be ascertained, then the following formula is used:

Properties of Coefficient of Correlation

• The value of the coefficient of correlation (r) always lies between±1. Such as:

  r=+1, perfect positive correlation

  r=-1, perfect negative correlation

  r=0, no correlation

• The coefficient of correlation is independent of the origin and scale.By origin, it means subtracting any non-zero constant from the given value of X and Y the vale of “r” remains unchanged. By scale it means, there is no effect on the value of “r” if the value of X and Y is divided or multiplied by any constant.
• The coefficient of correlation is a geometric mean of two regression coefficient. Symbolically it is represented as:

• The coefficient of correlation is “ zero” when the variables X and Y are independent. But, however, the converse is not true.

Assumptions of Karl Pearson’s Coefficient of Correlation

1. The relationship between the variables is “Linear”, which means when the two variables are plotted, a straight line is formed by the points plotted.
2. There are a large number of independent causes that affect the variables under study so as to form a Normal Distribution. Such as, variables like price, demand, supply, etc. are affected by such factors that the normal distribution is formed.
3. The variables are independent of each other.                                     

Note: The coefficient of correlation measures not only the magnitude of correlation but also tells the direction. Such as, r = -0.67, which shows correlation is negative because the sign is “-“ and the magnitude is 0.67.

Spearman Rank Correlation

Spearman rank correlation is a non-parametric test that is used to measure the degree of association between two variables.  The Spearman rank correlation test does not carry any assumptions about the distribution of the data and is the appropriate correlation analysis when the variables are measured on a scale that is at least ordinal.

The Spearman correlation between two variables is equal to the Pearson correlation between the rank values of those two variables; while Pearson’s correlation assesses linear relationships, Spearman’s correlation assesses monotonic relationships (whether linear or not). If there are no repeated data values, a perfect Spearman correlation of +1 or −1 occurs when each of the variables is a perfect monotone function of the other.

Intuitively, the Spearman correlation between two variables will be high when observations have a similar (or identical for a correlation of 1) rank (i.e. relative position label of the observations within the variable: 1st, 2nd, 3rd, etc.) between the two variables, and low when observations have a dissimilar (or fully opposed for a correlation of −1) rank between the two variables.

The following formula is used to calculate the Spearman rank correlation:

ρ = Spearman rank correlation

di = the difference between the ranks of corresponding variables

n = number of observations

Assumptions

The assumptions of the Spearman correlation are that data must be at least ordinal and the scores on one variable must be monotonically related to the other variable.

Arithmetic Mean

The arithmetic mean,’ mean or average is calculated by summ­ing all the individual observations or items of a sample and divid­ing this sum by the number of items in the sample. For example, as the result of a gas analysis in a respirometer an investigator obtains the following four readings of oxygen percentages:

He calculates the mean oxygen percentage as the sum of the four items divided by the number of items here, by four. Thus, the average oxygen percentage is

Mean = 61.3 / 4 =15.325%

Calculating a mean presents us with the opportunity for learning statistical symbolism. An individual observation is symbo­lized by Y_i, which stands for the ith observation in the sample. Four observations could be written symbolically as Yi, Y₂, Y₃, Y₄.

We shall define n, the sample size, as the number of items in a sample. In this particular instance, the sample size n is 4. Thus, in a large sample, we can symbolize the array from the first to the nth item as follows: Y₁, Y₂…, Y_n. When we wish to sum items, we use the following notation:

The capital Greek sigma, Ʃ, simply means the sum of items indica­ted. The i = 1 means that the items should be summed, starting with the first one, and ending with the nth one as indicated by the i = n above the Ʃ. The subscript and superscript are necessary to indicate how many items should be summed. Below are seen increasing simplifications of the complete notation shown at the extreme left:

Properties of Arithmetic Mean:

1. The sum of deviations of the items from the arithmetic mean is always zero i.e.

∑(X–X) =0.

2. The Sum of the squared deviations of the items from A.M. is minimum, which is less than the sum of the squared deviations of the items from any other values.
3. If each item in the series is replaced by the mean, then the sum of these substitutions will be equal to the sum of the individual items.                       

Merits of A.M:

1. It is simple to understand and easy to calculate.
2. It is affected by the value of every item in the series.
3. It is rigidly defined.
4. It is capable of further algebraic treatment.
5. It is calculated value and not based on the position in the series.

Demerits of A.M:

1. It is affected by extreme items i.e., very small and very large items.
2. It can hardly be located by inspection.
3. In some cases A.M. does not represent the actual item. For example, average patients admitted in a hospital is 10.7 per day.
4. M. is not suitable in extremely asymmetrical distributions.

Weighted Mean

In some cases, you might want a number to have more weight. In that case, you’ll want to find the weighted mean. To find the weighted mean:

1. Multiply the numbers in your data set by the weights.
2. Add the results up.

For that set of number above with equal weights (1/5 for each number), the math to find the weighted mean would be:
1(*1/5) + 3(*1/5) + 5(*1/5) + 7(*1/5) + 10(*1/5) = 5.2.

Sample problem: You take three 100-point exams in your statistics class and score 80, 80 and 95. The last exam is much easier than the first two, so your professor has given it less weight. The weights for the three exams are:

• Exam 1: 40 % of your grade. (Note: 40% as a decimal is .4.)
• Exam 2: 40 % of your grade.
• Exam 3: 20 % of your grade.

What is your final weighted average for the class?

1. Multiply the numbers in your data set by the weights:

   .4(80) = 32

   .4(80) = 32

   .2(95) = 19

2. Add the numbers up. 32 + 32 + 19 = 83.

The percent weight given to each exam is called a weighting factor.

Weighted Mean Formula

The weighted mean is relatively easy to find. But in some cases the weights might not add up to 1. In those cases, you’ll need to use the weighted mean formula. The only difference between the formula and the steps above is that you divide by the sum of all the weights.

The image above is the technical formula for the weighted mean. In simple terms, the formula can be written as:

Weighted mean = Σwx / Σw

Σ = the sum of (in other words…add them up!).
w = the weights.
x = the value.

To use the formula:

1. Multiply the numbers in your data set by the weights.
2. Add the numbers in Step 1 up. Set this number aside for a moment.
3. Add up all of the weights.
4. Divide the numbers you found in Step 2 by the number you found in Step 3.

In the sample grades problem above, all of the weights add up to 1 (.4 + .4 + .2) so you would divide your answer (83) by 1:
83 / 1 = 83.

However, let’s say your weighted means added up to 1.2 instead of 1. You’d divide 83 by 1.2 to get:
83 / 1.2 = 69.17.

Combined Mean

A combined mean is a mean of two or more separate groups, and is found by:

1. Calculating the mean of each group,
2. Combining the results.

Combined Mean Formula

More formally, a combined mean for two sets can be calculated by the formula :

Where:

• x_a = the mean of the first set,
• m = the number of items in the first set,
• x_b = the mean of the second set,
• n = the number of items in the second set,
• x_c the combined mean.

A combined mean is simply a weighted mean, where the weights are the size of each group.

Bayes’ Theorem is a way to figure out conditional probability. Conditional probability is the probability of an event happening, given that it has some relationship to one or more other events. For example, your probability of getting a parking space is connected to the time of day you park, where you park, and what conventions are going on at any time. Bayes’ theorem is slightly more nuanced. In a nutshell, it gives you the actual probability of an event given information about tests.

“Events” Are different from “tests.” For example, there is a test for liver disease, but that’s separate from the event of actually having liver disease.

Tests are flawed:

Just because you have a positive test does not mean you actually have the disease. Many tests have a high false positive rate. Rare events tend to have higher false positive rates than more common events. We’re not just talking about medical tests here. For example, spam filtering can have high false positive rates. Bayes’ theorem takes the test results and calculates your real probability that the test has identified the event.

Bayes’ Theorem (also known as Bayes’ rule) is a deceptively simple formula used to calculate conditional probability. The Theorem was named after English mathematician Thomas Bayes (1701-1761). The formal definition for the rule is:

In most cases, you can’t just plug numbers into an equation; You have to figure out what your “tests” and “events” are first. For two events, A and B, Bayes’ theorem allows you to figure out p(A|B) (the probability that event A happened, given that test B was positive) from p(B|A) (the probability that test B happened, given that event A happened). It can be a little tricky to wrap your head around as technically you’re working backwards; you may have to switch your tests and events around, which can get confusing. An example should clarify what I mean by “switch the tests and events around.”

Bayes’ Theorem Example

You might be interested in finding out a patient’s probability of having liver disease if they are an alcoholic. “Being an alcoholic” is the test (kind of like a litmus test) for liver disease.

A could mean the event “Patient has liver disease.” Past data tells you that 10% of patients entering your clinic have liver disease. P(A) = 0.10.

B could mean the litmus test that “Patient is an alcoholic.” Five percent of the clinic’s patients are alcoholics. P(B) = 0.05.

You might also know that among those patients diagnosed with liver disease, 7% are alcoholics. This is your B|A: the probability that a patient is alcoholic, given that they have liver disease, is 7%.

Bayes’ theorem tells you:

P(A|B) = (0.07 * 0.1)/0.05 = 0.14

In other words, if the patient is an alcoholic, their chances of having liver disease is 0.14 (14%). This is a large increase from the 10% suggested by past data. But it’s still unlikely that any particular patient has liver disease.