Arithmetic mean

Definition

The arithmetic mean is the sum of a set of numbers divided by the count of numbers in the set. It is commonly used to find the central tendency of data in finance, such as average returns.

5 Must Know Facts For Your Next Test

1. The arithmetic mean is sensitive to extreme values (outliers).
2. It can be distorted by skewed distributions.
3. In finance, it helps to understand average performance over time.
4. It assumes each value contributes equally to the final result.
5. Different from geometric mean, which is used for compounded growth rates.

Review Questions

• How do you calculate the arithmetic mean?
• Why might the arithmetic mean be misleading in skewed data sets?
• What is one key difference between arithmetic mean and geometric mean?

Related terms

Geometric Mean:

A type of average that indicates the central tendency of a set of numbers by using the product of their values.

Median:

The middle value in a data set when it is ordered from least to greatest.

Mode:

The value that appears most frequently in a data set.