Arithmetic Mean

To find the arithmetic mean, add all the numbers together and divide by how many there are. For the values 3, 5, 5, 7 and 10, the sum is 30 and there are five values, so the mean is 6.

The mean is widely used in finance to summarise data, such as average monthly spending, average sales per store or average annual returns.

It has an important weakness: it is sensitive to extreme values. If one value in a small data set is very large or very small, it can pull the mean far away from what is typical. For example, if nine employees earn 40,000 and one earns 1,000,000, the mean salary is 136,000, which describes nobody in the group. In such cases, the median often gives a better picture.

For investment returns over several periods, the arithmetic mean can also be misleading. If an investment rises 50% one year and falls 50% the next, the arithmetic mean return is 0%, but the investor has actually lost 25% of their money. The geometric mean captures this effect correctly.