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Definition of 'Geometric Mean'
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:
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.
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Investopedia explains '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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