What Geometric mean is
The geometric mean is a type of mean or average, used mainly in statistics and probability theory, which uses the product of a set of numbers to calculate the average. The geometric mean is particularly useful for sets of numbers that are expressed in different units, such as the growth rate of investments with different rates of return.
Steps for calculating geometric mean:
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Arrange all numbers in descending order.
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Find the product of all the numbers.
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Take the nth root of the product, where n is the number of numbers.
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The result is the geometric mean.
Examples
- Geometric mean is used to calculate the average rate of return on an investment when different investment periods have different returns.
- Geometric mean can be used to compare the relative performance of mutual funds with different returns over different time periods.
- Geometric mean can be used to calculate the average growth rate for a population over a period of time (e.g. population growth rate).
- Geometric mean is used to compare the relative performance of companies with different growth rates over different time periods.