Mean Formula

Updated on March 13, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Mean Formula?

Mean refers to the mathematical average calculated for a set of two or more values. There are primarily two ways of calculating it: arithmetic means, where all the numbers are added and then divided by the number of items, and geometric mean, where we multiply the numbers together and then take the Nth root and subtract it with one.

Mean Formula

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The arithmetic mean formula determines the average value in the data. It is a vital function in education, healthcare, and the business world as it gives the individual an idea of the center value of the data set. In fact, it proves to be the yardstick for observations beyond the basic analysis or any data.

Key Takeaways

  • Mean means the mathematical average estimated for two or more values. 
  • One may calculate it in two ways: arithmetic means, where all the numbers are added and then divided by the number of items, and geometric mean, where we multiply the numbers and then take the Nth root and deduct it with one.
  • The arithmetic mean formula means calculating by adding all the available periodic returns and dividing the result by the periods’ number.
  • The geometric mean formula means calculating by initially adding one to each available periodic return, multiplying them, raising the result to the reciprocal power of the periods, and subtracting one from it.

Formula

The mean of a data set can be calculated through either geometric or arithmetic mean formula. Both formulae have been explained below.

The arithmetic mean formula is calculated by adding all the available periodic returns and dividing the result by the number of periods.

Arithmetic mean = (r1 + r2 + …. + rn) / n

where Ri = return in the ith year and n = Number of periods

The geometric mean formula is calculated by initially adding one to each of the available periodic returns, then multiplying them and raising the result to the power of the reciprocal of the number of periods, and then deducting one from it.

Geometric mean = [(1 + r1) * (1 + r2) * …. * (1 + rn)] 1/n – 1
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Calculation

Now that we have understood the mean formula, let us see how the calculation process for it is executed through the discussion below.

Steps to Calculate Arithmetic Mean

  • Step 1: Firstly, determine the returns for various periods based on the portfolio’s value or investment at various times. The returns are denoted by r1, r2, ….., rn corresponding to 1st year, 2nd year,…., nth year.
  • Step 2: Next, determine the number of periods denoted by n.
  • Step 3: Finally, the arithmetic average of returns is calculated by adding all the periodic returns and dividing the result by the number of periods, as shown above.

Steps to Calculate Geometric Mean

  • Step 1: First, determine the various periodic returns denoted by r1, r2, ….., rn corresponding to 1st year, 2nd year,…., nth year.
  • Step 2: Next, determine the number of periods denoted by n.
  • Step 3: Finally, the geometric average of returns is calculated by initially adding one to each of the available periodic returns, then multiplying them and raising the result to the power of the reciprocal of the number of periods, and then deducting one from it as shown above.

Examples

Let us understand the mean formula statistics through the detailed calculation and examples below.

You can download this Mean Formula Excel Template here – Mean Formula Excel Template

Let us take an example of company stock with the following stock price at the end of each financial year.

mean formula example 1.1

Calculate the arithmetic and geometric mean of the annual returns based on the given information.

Return of 1st year, r1

mean formula example 1.2
  • Return of 1st year, r1 = [(Closing stock price / Opening stock price) – 1] * 100%
  • = [($110.15 / $100.00) – 1] * 100%
  • = 10.15%

Similarly, we have calculated the returns for the year as follows:

Return of 2nd year, r= [($117.35 / $110.15) – 1] * 100%

= 6.54%

Return of 3rd year, r= [($125.50 / $117.35) – 1] * 100%

= 6.95%

Return of 4th year, r= [($130.10 / $125.50) – 1] * 100%

= 3.67%

Return of 5th year, r= [($140.00 / $130.10) – 1] * 100%

= 7.61%

Therefore, the calculation of the arithmetic mean equation is as follows:

mean formula example 1.3
  • Arithmetic mean = (r1 + r2 + r3 + r4 + r5) / n
  • = (10.15% + 6.54% + 6.95% + 3.67% + 7.61%) / 5

The Arithmetic Average of Returns will be:

mean formula example 1.4

Now, the calculation of geometric average equation is done as follows:

mean formula example 1.5
  • Geometric mean = [(1 + r1) * (1 + r2) * (1 + r3) * (1 + r4) * (1 + rn)] 1/n – 1
  • = [(1 + 10.15%) * (1 + 6.54%) * (1 + 6.95%) * (1 + 3.67%) * (1 + 7.61%)] 1/5 – 1

The Geometric Average of Returns will be:

mean formula example 1.6

Therefore, the arithmetic and the geometric mean of the returns are 6.98% and 6.96% respectively.

Relevance and Uses

From the perspective of an analyst, an investor, or any other financial user, it is very important to understand the concept of mean formula statistics as it is a statistical indicator used to estimate a company’s stock performance over a certain period, which can be days, months, or years.

Mean Formula In Excel

Now, let us take the example of the stock prices of Apple Inc. for 20 days to illustrate the concept of mean in the Excel template below.

The calculation of the arithmetic mean formula is as follows:

Arithmetic calculation example 2.2
Arithmetic calculation example 2.3

The geometric mean is as follows:

Geometric calculation example 2.4
Geometric calculation example 2.5

The table provides a detailed calculation of the arithmetic and geometric mean.

arithmetic & Geometric calculation

Frequently Asked Questions (FAQs)

What is assumed mean formula?

In statistics, the assumed mean is a technique for estimating a data set’s arithmetic mean and standard deviation. n addition, it clarifies calculating appropriate values by hand. The interest is historical, but one may rapidly use it to determine the statistics.

What is mean formula in research?

The mean formula in Excel is obtained by dividing all values sum into a data set by the number of the values. In addition, one can calculate it from raw data or data aggregated in a frequency table.

How to do mean formula in Excel?

The mean formula in Excel provides the average or arithmetic mean. For example, if the range C1:C30 contains numbers, the formula =AVERAGE(C1:C30) returns the average of those numbers.

How to get mean formula?

One may obtain the mean formula by simply dividing the sum of all values into a data set by the number of values.

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