Geometric Mean

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What is the 'Geometric Mean'

The geometric mean is the average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio. Technically defined as "the 'n'th root product of 'n' numbers", the formula for calculating geometric mean is most easily written as:

Geometric Mean

Where 'n' represents the number of returns in the series.

The geometric mean must be used when working with percentages (which are derived from values), whereas the standard arithmetic mean will work with the values themselves.

BREAKING DOWN 'Geometric Mean'

The main benefit to using the geometric mean is that the actual amounts invested do not need to be known; the calculation focuses entirely on the return figures themselves and presents an "apples-to-apples" comparison when looking at two investment options.

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RELATED FAQS
  1. How can investors benefit by understanding geometric means?

    Discover why investors should know the difference between geometric and arithmetic means, and why the geometric mean is more ... Read Answer >>
  2. What are some examples of applications of the geometric mean?

    Learn about applications of the geometric mean based on examples such as calculations of portfolio return, growth rates and ... Read Answer >>
  3. What is a geometric mean in statistics?

    Learn what the geometric mean is in statistics and how it is used to calculate various growth rates and returns by financial ... Read Answer >>
  4. Can two numbers have the same arithmetic and geometric means?

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  5. The ABC Global mutual fund exhibited the following rates of return over the last ...

    The correct answer is: a) Arithmetic Mean = (15 + -7 + 6.5 + -11.3 + 32.7)/5 = 7.18% Geometric Mean =[(1.15 x 0.93 x 1.065 ... Read Answer >>
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