Financial Modeling Tutorials

- Financial Modeling Basics
- Excel Modeling
- Financial Functions in Excel
- Sensitivity Analysis in Excel
- Time Value of Money
- Future Value Formula
- Present Value Factor
- Perpetuity Formula
- Present Value vs Future Value
- Annuity vs Pension
- Present Value of an Annuity
- Doubling Time Formula
- Annuity Formula
- Annuity vs Perpetuity
- Annuity vs Lump Sum
- Internal Rate of Return (IRR)
- NPV vs XNPV
- NPV vs IRR
- NPV Formula
- PV vs NPV
- IRR vs ROI
- Break Even Point
- Payback Period & Discounted Payback Period
- Payback period Formula
- Discounted Payback Period Formula
- Profitability Index
- Cash Burn Rate
- Simple Interest
- Simple Interest vs Compound Interest
- Simple Interest Formula
- CAGR Formula (Compounded Annual Growth Rate)
- Effective Interest Rate
- Loan Amortization Schedule
- Mortgage Formula
- Loan Principal Amount
- Interest Rate Formula
- Rate of Return Formula
- Effective Annual Rate
- Effective Annual Rate Formula (EAR)
- Daily Compound Interest
- Monthly Compound Interest Formula
- Discount Rate vs Interest Rate
- Rule of 72
- Geometric Mean Return
- Real Rate of Return Formula
- Continuous compounding Formula
- Weighted average Formula
- Average Formula
- Average Rate of Return Formula
- Mean Formula
- Weighted Mean Formula
- Harmonic Mean Formula
- Median Formula in Statistics
- Range Formula
- Expected Value Formula
- Exponential Growth Formula
- Margin of Error Formula
- Decrease Percentage Formula
- Percent Error Formula
- Holding Period Return Formula
- Cost Benefit Analysis
- Cost Volume Profit Analysis
- Opportunity Cost Formula
- Mortgage APR vs Interest Rate
- Regression Formula
- Correlation Coefficient Formula
- Covariance Formula
- Coefficient of Variation Formula
- Sample Standard Deviation Formula
- Relative Standard Deviation Formula
- Volatility Formula
- Binomial Distribution Formula
- Quartile Formula
- P Value Formula
- Skewness Formula
- Regression vs ANOVA

**Harmonic Mean Formula (Table of Contents)**

## What is the Harmonic Mean Formula?

Harmonic mean formula is a kind of average which is calculated by dividing the number of observations in the given dataset by the sum of its reciprocals (1/Xi) of every observation in the given dataset.

Harmonic Mean is represented as follows,

**Harmonic Mean Formula = n / ∑ [1/X**

_{i}

**]**

- One can see it’s the reciprocal of the normal mean.
- The Harmonic mean formula for normal mean is ∑ x / n so if the formula is reversed it becomes n / ∑x and then all the values of the denominator that must be used should be reciprocal i.e. for the numerator it remains “n” but for the denominator the values or the observations for them we need to use to reciprocal values.
- The value that is derived would always be less than average or say the arithmetic mean.

### Examples of Harmonics Mean Formula(with Excel Template)

Let’s see some simple to advanced examples of a harmonic mean equation to understand it better.

#### Example #1

**Consider a data set of following numbers: 10, 2, 4, 7. Using the above-discussed formula you are required to calculate Harmonic mean.**

**Solution:**

Use the following data for the calculation of the harmonic mean.

Calculation of Harmonic mean can be done as follows,

The Harmonic mean Formula = n / ∑ [1/ X_{i }]

4.9 (927 ratings)

= 4/ (1/10 + 1/2 + 1/4 + 1/7)

= 4 / 0.99

Harmonic Mean will be –

**Harmonic Mean** = **4.03**

#### Example #2

**Mr.Vijay is a stock analyst in JP Morgan. His manager has asked him to determine the P/E ratio of the index which tracks the stock prices of Company W, Company X, and Company Y. Company W reports earnings of $40 million and the market capitalization of $2 billion, Company X reports earnings of $3 billion and the market capitalization of $9 billion and while Company Y reports earnings of $10 billion and the market capitalization of $40 billion. Calculate the Harmonic mean for P/E ratio of the index.**

**Solution:**

Use the following data for the calculation of the harmonic mean.

First, we shall calculate the P/E ratio

P/E ratio is essentially (the market capitalization / the earnings).

- P/E of (Company W) = ($2 billion) / ($40 million) = 50
- P/E of (Company X) = ($9 billion) / ($3 billion) = 3
- P/E of (Company Y) = ($40 billion) / ($10 billion) = 4

Calculation of 1/X value

- Company W = 1/50 = 0.02
- Company X= 1/3 = 0.33
- Company Y= 1/4 = 0.25

Calculation of Harmonic mean can be done as follows,

The Harmonic mean Formula= n /__ ∑[1/ X___{i}]

- =3/(1/50 + 1/3 + 1/4)
- =3/0.60

Harmonic mean will be –

**Harmonic Mean **= **4.97**

#### Example #3

**Rey a resident of northern California is a professional sports biker and is on his tour to a beach from his home on Sunday evening around 5:00 PM EST. He drives his sports bike at 50 mph for the 1 ^{st} half of the journey and 70 mph for the 2^{nd} half from his home to the beach. What will be his average speed?**

**Solution:**

Use the following data for the calculation of the harmonic mean.

In this example, Rey went on a journey with a certain speed and here the average would be based on distance.

Calculation of Harmonic mean can be done as follows,

Using the below formula, we can calculate Harmonic mean for the average speed of Rey’s sports bike.

The Harmonic mean Formula = n / ∑[1/ X_{i}]

- =2/ (1/50 + 1/70)
- =2/ 0.03

Harmonic Mean will be –

The average speed of Rey’s sports bike is 58.33.

**Harmonic Mean** = **58.33**

### Relevance and Use

Harmonic means like other average formulas they also do have several usages and they are mainly used in the field of finance to average certain data such as price multiples. The financial multiples like P/E ratio must not be averaged using the normal mean or the arithmetic mean because those mean are biased towards the larger values Harmonic means further can also be used to identify a certain type of patterns like Fibonacci sequences that are majorly used in technical analysis by the market technicians.

The Harmonic mean formula also deals with averages of units such as rates, ratios or speed, etc. Also, it is important to note that Harmonic mean is affected by the extreme values in the given data set or in a given set of observations.

The harmonic mean is defined rigidly and is based upon all the values or all the observations in a given dataset or sample and it can be suitable for further mathematical treatment. Like the geometric mean, Harmonic mean is also not affected much with the fluctuations in observations or sampling. This would be giving greater importance to the small values or the small observations and this will be useful only when those small values or those small observations need to be given greater weight.

### Recommended Articles

This has been a guide to Harmonic Mean Formula. Here we discuss how to calculate harmonic mean with examples and downloadable excel template. You can learn more about excel modeling from the following articles –

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