Dictionary
search :       browse :
 # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

 Everyday Examples
Geometric Mean:  If a/x = x/b (or x2 = ab), then x is called the geometric mean between a and b. The geometric mean is sometimes called the mean proportional.
 The geometric mean is relevant any time several quantities multiply together to produce a product. The geometric mean answers the question, "if all the quantities had the same value, what would that value have to be in order to achieve the same product?" For example, suppose you have an investment which earns 10% the first year, 50% the second year, and 30% the third year. What is its average rate of return? It is not the arithmetic mean, because what these numbers mean is that on the first year your investment was multiplied (not added to) by 1.10, on the second year it was multiplied by 1.60, and the third year it was multiplied by 1.20. The relevant quantity is the geometric mean of these three numbers. The question about finding the average rate of return can be rephrased as: "by what constant factor would your investment need to be multiplied by each year in order to achieve the same effect as multiplying by 1.10 one year, 1.60 the next, and 1.20 the third?" The answer is the geometric mean (1.10 x 1.60 x 1.20)^(1/3). If you calculate this geometric mean you get approximately 1.283, so the average rate of return is about 28% (not 30% which is what the arithmetic mean of 10%, 60%, and 20% would give you). Any time you have a number of factors contributing to a product, and you want to find the "average" factor, the answer is the geometric mean. The example of interest rates is probably the application most used in everyday life.