What is Quantitative Analysis?

Quantitative analysis is the process of collecting and evaluating measurable and

verifiable data such as revenues, market share, and wages in order to understand
the behavior and performance of a business. In the past, business owners and
company directors relied heavily on their experience and instinct when making
decisions. However, with data technology, quantitative analysis is now considered a
better approach to making informed decisions.

A quantitative analyst’s main task is to present a given hypothetical situation in terms

of numerical values. Quantitative analysis helps in evaluating performance,
assessing financial instruments, and making predictions. It encompasses three main
techniques of measuring data: regression analysis, linear programming, and data
mining.

Quantitative Analysis Techniques

1. Regression Analysis

Regression analysis is a common technique that is not only employed by business

owners but also by statisticians and economists. It involves using statistical
equations to predict or estimate the impact of one variable on another. For instance,
regression analysis can determine how interest rates affect consumers’ behavior
regarding asset investment. One other core application of regression analysis is
establishing the effect of education and work experience on employees’ annual
earnings.

In the business sector, owners can use regression analysis to determine the impact
of advertising expenses on business profits. Using this approach, a business owner
can establish a positive or negative correlation between two variables.

2. Linear Programming

Most companies occasionally encounter a shortage of resources such as facility

space, production machinery, and labor. In such situations, company managers must
find ways to allocate resources effectively. Linear programming is a quantitative
method that determines how to achieve such an optimal solution. It is also used to
determine how a company can make optimal profits and reduce its operating costs,
subject to a given set of constraints, such as labor.

3. Data Mining

Data mining is a combination of computer programming skills and statistical

methods. The popularity of data mining continues to grow in parallel with the
increase in the quantity and size of available data sets. Data mining techniques are
used to evaluate very large sets of data to find patterns or correlations concealed
within them.
Applications of Quantitative Analysis in the Business Sector

Business owners are often forced to make decisions under conditions of uncertainty.
Luckily, quantitative techniques enable them to make the best estimates and thus
minimize the risks associated with a particular decision. Ideally, quantitative models
provide company owners with a better understanding of information to enable them
to make the best possible decisions.

Project Management

One area where quantitative analysis is considered an indispensable tool is

in project management. As mentioned earlier, quantitative methods are used to find
the best ways of allocating resources, especially if these resources are scarce.
Projects are then scheduled based on the availability of certain resources.

Production Planning

Quantitative analysis also helps individuals to make informed product-planning

decisions. Let’s say a company finds it challenging to estimate the size and location
of a new production facility. Quantitative analysis can be employed to assess
different proposals for costs, timing, and location. With effective product planning
and scheduling, companies will be more able to meet their customers’ needs while
maximizing their profits.

Marketing

Every business needs a proper marketing strategy. However, setting a budget for the
marketing department can be tricky, especially if its objectives are not set. With the
right quantitative method, marketers can easily set the required budget and allocate
media purchases. The decisions can be based on data obtained from marketing
campaigns.

Finance

The accounting department of a business also relies heavily on quantitative analysis.

Accounting personnel uses different quantitative data and methods, such as
the discounted cash flow model, to estimate the value of an investment. Products
can also be evaluated based on the costs of producing them and the profits they
generate.

Purchase and Inventory

One of the greatest challenges that businesses face is being able to predict the
demand for a product or service. However, with quantitative techniques, companies
can be guided on just how many materials they need to purchase, the level of
inventory to maintain, and the costs they’re likely to incur when shipping and storing
finished goods.
The Bottom Line

Quantitative analysis is the use of mathematical and statistical techniques to assess

the performance of a business. Before the advent of quantitative analysis, many
company directors based their decisions on experience and gut. Business owners
can now use quantitative methods to predict trends, determine the allocation of
resources, and manage projects.

Quantitative techniques are also used to evaluate investments. In such a way,

organizations can determine the best assets to invest in and the best time to do so.
Some of the quantitative analysis methods include regression analysis, linear
programming, and data mining.
Chi-Square Test
A chi-squared test (symbolically represented as χ2) is basically a data analysis on the basis of
observations of a random set of variables. Usually, it is a comparison of two statistical data
sets. This test was introduced by Karl Pearson in 1900 for categorical data analysis and
distribution. So it was mentioned as Pearson’s chi-squared test.
The chi-square test is used to estimate how likely the observations that are made would be, by
considering the assumption of the null hypothesis as true.
A hypothesis is a consideration that a given condition or statement might be true, which we
can test afterwards. Chi-squared tests are usually created from a sum of squared falsities or
errors over the sample variance.

Chi-Square Distribution
When we consider, the null speculation is true, the sampling distribution of the test statistic is called
as chi-squared distribution. The chi-squared test helps to determine whether there is a notable difference
between the normal frequencies and the observed frequencies in one or more classes or categories. It gives
the probability of independent variables.
Note: Chi-squared test is applicable only for categorical data, such as men and women falling under the
categories of Gender, Age, Height, etc.

Finding P-Value
P stands for probability here. To calculate the p-value, the chi-square test is used in statistics. The different
values of p indicates the different hypothesis interpretation, are given below:

 P≤ 0.05; Hypothesis rejected

 P>.05; Hypothesis Accepted
Probability is all about chance or risk or uncertainty. It is the possibility of the outcome of the sample or
the occurrence of an event. But when we talk about statistics, it is more about how we handle various data
using different techniques. It helps to represent complicated data or bulk data in a very easy and
understandable way. It describes the collection, analysis, interpretation, presentation, and organization of
data. The concept of both probability and statistics is related to the chi-squared test.

Properties
The following are the important properties of the chi-square test:

 Two times the number of degrees of freedom is equal to the variance.

 The number of degree of freedom is equal to the mean distribution
 The chi-square distribution curve approaches the normal distribution when the degree of freedom
increases.

Formula
The chi-squared test is done to check if there is any difference between the observed value and expected
value. The formula for chi-square can be written as;
or
χ2 = ∑(Oi – Ei)2/Ei
where Oi is the observed value and Ei is the expected value.

Chi-Square Test of Independence

The chi-square test of independence also known as the chi-square test of association which is used to
determine the association between the categorical variables. It is considered as a non-parametric test. It is
mostly used to test statistical independence.
The chi-square test of independence is not appropriate when the categorical variables represent the pre-test
and post-test observations. For this test, the data must meet the following requirements:

 Two categorical variables

 Relatively large sample size
 Categories of variables (two or more)
 Independence of observations

What is the chi-square test write its formula?

When we consider the null hypothesis is true, the test statistic’s sampling distribution is called chi-
squared distribution. The formula for chi-square is:
χ^2 = ∑(O_i – E_i)^2/E_i
Here,
O_i = Observed value
E_i = Expected value

How do you calculate chi squared?

The value of the Chi-squared statistic can be calculated using the formula given below:
χ^2 = ∑(O_i – E_i)^2/E_i
This can be done as follows.
For each observed number in the data, subtract the corresponding expected value, i.e. (O — E).
Square the difference, (O — E)^2
Divide these squares by the expected value of each observation, i.e. [(O – E)^2 / E].
Finally, take the sum of these values.
Thus, the obtained value will be the chi-squared statistic.

What is a chi-square test used for?

The chi-squared test is done to check if there is any difference between the observed value and the
expected value.

How do you interpret a chi-square test?

For a Chi-square test, a p-value that is less than or equal to the specified significance level indicates
sufficient evidence to conclude that the observed distribution is not the same as the expected
distribution. Here, we can conclude that a relationship exists between the given categorical
variables.

What is a good chi-square value?

A good chi-square value is assumed to be 5. As we know, for the chi-square approach to be valid, the
expected frequency should be at least 5.
ABLE OF CONTENTS

 ECONOMY
 ECONOMICS

Degrees of Freedom in Statistics Explained: Formula and

Example
By

AKHILESH GANTI

Investopedia / Joules Garcia

What Are Degrees of Freedom?

Degrees of freedom refers to the maximum number of logically
independent values, which are values that have the freedom to vary, in the
data sample. Once the degrees of freedom quantity have been selected,
specific data sample items must be chosen if there is a outstanding
requirement of the data sample.

The earliest and most basic concept of degrees of freedom was noted in
the early 1800s, intertwined in the works of mathematician and astronomer
Carl Friedrich Gauss. The modern usage and understanding of the term
were expounded upon first by William Sealy Gosset, an English
statistician, in his article "The Probable Error of a Mean," published in
Biometrika in 1908 under a pen name to preserve his anonymity.

In his writings, Gosset did not specifically use the term "degrees of
freedom." He did, however, give an explanation for the concept throughout
the course of developing what would eventually be known as Student’s T-
distribution. The actual term was not made popular until 1922. English
biologist and statistician Ronald Fisher began using the term "degrees of
freedom" when he started publishing reports and data on his work
developing chi-squares.

KEY TAKEAWAYS

 Degrees of freedom refers to the maximum number of logically

independent values, which are values that have the freedom to vary,
in the data sample.
 Degrees of freedom is calculated by subtracting one from the
number of items within the data sample.
 Degrees of freedom are commonly discussed in relation to various
forms of hypothesis testing in statistics, such as a chi-square.
  Calculating degrees of freedom is key when trying to understand the
importance of a chi-square statistic and the validity of the null
hypothesis.
 Degrees of freedom can also describe business situations where
management must made a decision that dictates the outcome of
another variable.
Understanding Degrees of Freedom
Degrees of freedom are the number of independent variables that can be
estimated in a statistical analysis. These value of these variables are
without constraint, although the values do impost restrictions on other
variables if the data set is to comply with estimate parameters.

Within a data set, some initial numbers can be chosen at random.

However, if the data set must add up to a specific sum or mean, for
example, the number in the data set is constrained to evaluate the values
of all other values in a data set, then meet the set requirement.

Examples of Degrees of Freedom

The easiest way to understand degrees of freedom conceptually is through
several examples.
Example 1: Consider a data sample consisting of five positive integers.
The values of the five integers must have an average of six. If four of the
items within the data set are {3, 8, 5, and 4}, the fifth number must be 10.
Because the first four numbers can be chosen at random, the degrees of
freedom is four.
Example 2: Consider a data sample consisting of five positive integers.
The values could be any number with no known relationship between
them. Because all five numbers can be chosen at random with no
limitations, the degrees of freedom is four.
Degrees of Freedom Formula
The formula to determine degrees of freedom is:

\begin{aligned} &\text{D}_\text{f} = N - 1 \\ &\textbf{where:} \\

&\text{D}_\text{f} = \text{degrees of freedom} \\ &N = \text{sample size} \\
\end{aligned}Df=N−1where:Df=degrees of freedomN=sample size

For example, imagine a task of selecting 10 baseball players whose bating

average must average to .250. The total number of players that will make
up our data set is the sample size, so N = 10. In this example, 9 (10 - 1)
baseball players can theoretically be picked at random, with the 10th
baseball player having to have a specific batting average to adhere to the
.250 batting average constraint.
Application of Degrees of Freedom
In statistics, degrees of free defines the shape of the t-distribution used in
t-tests when calculating the p-value. Depending on the sample size,
different degrees of freedom will display different t-distributions.
Calculating degrees of freedom is also critical when trying to understand
the importance of a chi-square statistic and the validity of the null
hypothesis.
Degrees of freedom also has conceptual applications outside of statistics.
As a business is faced with making decisions, one choice may affix the
result of another variable. Consider a company deciding on how much raw
materials to purchase as part of its manufacturing process. The company
has two items within this data set: the amount of raw materials to acquire
and the total cost of the raw materials.
The company freely decide one of the two items, but their choice will
dictate the outcome of the other. By setting the amount of raw materials to
acquire, the company does not have a say in the total amount spent. By
setting the total amount to spend, the company may be limited in the
amount of raw materials it can acquire. Because it can only freely choose
one of the two, it has one degree of freedom in this situation

Some statistical analysis processes may call for an indication on the

number of independent values that can vary within an analysis to still meet
constraint requirements. This indication is the degrees of freedom, the
number of units in a sample size that can chosen at random before a
specific value must be picked.