In: Finance
In terms of the Z-Score calculation, which factors are involved in that calculation? Why do you think these specific factors were chosen?
A Z-score is nothing but the number of standard deviations an element is away from the mean. We know that mean is the average of given data. When we consider the actual results, there will be variation from the mean. That variation is measured by the standard deviation. Z-score is usually calculated to know the probability of occurring of an element and for comparison too. The formula for Z-score is (Value-Mean)/Standard deviation. So, the factors considered in the calculation of Z-score are the mean, the value and standard deviation. Firstly, we must deduct the mean of the data from the value. Then we must divide the answer by the standard deviation. As we have already discussed that Z-score is the measure of how many standard deviations an element is away from the mean, we must divide the difference between the value and the average(mean) by the standard deviation. Then we get how many standard deviations is the difference. This is the relevance of the factors considered in the Z-score calculation.