Calculating The Means
in statistics, a mean refers to an average within a list of two or more values. generally, the mean is calculated by adding every value in a set and dividing it by the number of values in the set. this is referred to as an arithmetic mean. in this example, we look at how the arithmetic and geometric mean measure a portfolio's return. ? has a portfolio with three assets which at the end of three years has 25%, 56% and 5% returns respectively. he calculates the portfolio's arithmetic mean by adding the three numbers and dividing it by three to find an average of 28%. however, a geometric mean is more common to average return calculations in finance. when ? uses the geometric mean, he multiplies the returns and finds the nth root or in this case the cube root because there are three assets. the result shows a lower but more accurate return of 19%. in finance, a geometric mean is better suited for finding the average return for a portfolio, as it links the percentage gains and losses from one period to another. though arithmetic mean is more commonly used in finding averages, it calculates data as if they were independent from one another which is not the case when it comes to your portfolio's growth.