Geometric Mean

AAA

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:

 

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.

VIDEO

Loading the player...

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.

RELATED TERMS
  1. Market Average

    A measure of the overall price level of a given market, as defined ...
  2. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  3. Arithmetic Mean

    A mathematical representation of the typical value of a series ...
  4. Mean

    The simple mathematical average of a set of two or more numbers. ...
  5. Average Price

    1. A representative measure of a range of prices that is calculated ...
  6. Harmonic Average

    The mean of a set of positive variables. Calculated by dividing ...
Related Articles
  1. Fundamental Analysis

    Explaining the 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.
  2. Active Trading Fundamentals

    Simple Moving Averages Make Trends Stand Out

    The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool.
  3. Fundamental Analysis

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  4. Investing Basics

    Overcoming Compounding's Dark Side

    Understanding how money is made and lost over time can help you improve your returns.
  5. Active Trading Fundamentals

    Weighted Moving Averages: The Basics

    We take a closer look at the linearly weighted moving average and the exponentially smoothed moving average.
  6. Active Trading

    Moving Averages

    Discover one of the most reliable indicators in technical analysis and learn how to incorporate it into your trading routine.
  7. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  8. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  9. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  10. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
RELATED FAQS
  1. What are some examples of applications of the geometric mean?

    In statistics, the geometric mean is calculated by raising the product of series of numbers to the inverse of the total length ... Read Full Answer >>
  2. What is a geometric mean in statistics?

    In statistics there exists a wide variety of metrics such as median, standard deviation, arithmetic mean, power mean, geometric ... Read Full Answer >>
  3. How do you calculate the geometric mean to assess portfolio performance?

    The geometric mean is used to calculate the central tendency of a set of numbers. It is the average of the logarithmic values ... Read Full Answer >>
  4. Who developed the human development index (HDI) and why?

    The United Nations Development Programme developed the Human Development Index (HDI) to create a uniform statistic to measure ... Read Full Answer >>
  5. Is the market risk premium the same for stocks and bonds?

    Stocks and bonds carry investment risk. Buyers demand a premium return or a discounted cost from sellers or issuers in exchange ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!