Mean

What Is the Mean?

A mean is the simple mathematical average of a set of two or more numbers. The mean for a given set of numbers can be computed in more than one way, including the arithmetic mean method, which uses the sum of the numbers in the series, and the geometric mean method, which is the average of a set of products. However, all of the primary methods of computing a simple average produce the same approximate result most of the time.

Key Takeaways

  • The mean is the mathematical average of a set of two or more numbers.
  • The arithmetic mean and the geometric mean are two types of mean that can be calculated.
  • Summing the numbers in a set and dividing by the total number gives you the arithmetic mean.
  • The geometric mean is more complicated and involves the multiplication of the numbers taking the nth root.
  • The mean helps to assess the performance of an investment or company over a period of time, and many other uses.
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Calculating The Means

Understanding the Mean

The mean is a statistical indicator that can be used to gauge the performance of a company’s stock price over a period of days, months, or years; a company through its earnings over a number of years; a firm by assessing its fundamentals such as price-to-earnings ratio, free cash flow, and liabilities on the balance sheet; and a portfolio by estimating its average returns over a certain period.

An analyst who wants to measure the trajectory of a company’s stock value in the last, say, 10 days, would sum up the closing price of the stock in each of the 10 days. The sum total would then be divided by the number of days to get the arithmetic mean. The geometric mean will be calculated by multiplying all of the values together. The nth root of the product total is then taken, in this case, the 10th root, to get the mean.

Arithmetic Mean vs. Geometric Mean

Let’s put this into practice by examining the stock price of Nvidia Corp. (NVDA) for a 10 day period in 2017. An investor that purchased NVDA on June 5 for $148.01 wants to know how well his investment has fared after 10 days. The table below shows the price and returns from June 6 to June 19, 2017.

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Image by Sabrina Jiang © Investopedia 2021

The arithmetic mean is 0.67%, and is simply the sum total of the returns divided by 10. However, the arithmetic mean of returns is only accurate when there is no volatility, which is nearly impossible with the stock market.

The geometric mean factors in compounding and volatility, making it a better metric of average returns. Since it is impossible to take the root of a negative value, add one to all the percentage returns so that the product total yields a positive number. Take the 10th root of this number and remember to subtract from one to get the percentage figure. The geometric mean of returns for the investor in the last five days is 0.61%. As a mathematical rule, the geometric mean will always be equal to or less than the arithmetic mean.

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Image by Sabrina Jiang © Investopedia 2021

In addition to the arithmetic and geometric means, the harmonic mean is calculated by dividing the number of observations by the reciprocal (one over the value) of each number in the series. Harmonic means are often used in finance to average data that occurs in fractions, ratios, or percentages, such as yields, returns, or price multiples.

Example of the Mean

Proof that the geometric mean provides a better value is given in the table. When the arithmetic mean of 0.67% is applied to each of the stock prices, the end value is $152.63. But clearly, NVDA traded for $157.32 on the last day. This means that the arithmetic mean of returns is understated.

On the other hand, when each of the closing prices is raised by the geometric average return of 0.61%, the exact price of $157.32 is calculated. This is an example of why the geometric mean is an accurate reflection of the true return of a portfolio.

While the mean is a good tool to evaluate the performance of a company or portfolio, it should also be used with other fundamentals and statistical tools to get a better and broader picture of the investment's historical and future prospects.

What Is a Mean in Math?

In mathematics and statistics, the mean refers to the average of a set of values. The mean can be computed in a number of ways, including the simple arithmetic mean (add up the numbers and divide the total by the number of observations), the geometric mean, and the harmonic mean.

How Do You Find the Mean?

The mean is a characteristic of a set of data that describes some sort of average. To find the mean you can compute it mathematically using one of several methods depending on the structure of the data and the type of average you need. You can also visually identify the mean in many cases by plotting the data distribution. In a normal distribution, the mean, mode, and median are all the same value that occurs at the center of the plot.

What Is the Difference Between Mean, Median, and Mode?

The mean is the average that appears in a set of data. The median, instead, is the midway point above (below) where 50% of the values in the data sits. The mode refers to the most frequently observed value in the data (the one that occurs the most).

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