Alternative Mean Definitions for Different Investment Problems

Suitability of Alternative Mean Definitions for Different Investment Problems

$$
\begin{array}{l|l}
\textbf { Type of Data } & \textbf { Mean to Use } \\
\hline \text { Single period data } & \text { Arithmetic mean } \\
\hline \text { More than one-period data } & \text { Geometric mean } \\
\hline \begin{array}{l}
\text { Data where each observation has different } \\
\text { weights }
\end{array} & \text { Weighted mean } \\
\hline \text { For ratios and rates } & \text { Harmonic mean } \\
\hline \text { For data having extreme outliers } & \text { Trimmed mean or Winsorized mean } \\
\end{array}
$$

Question 

Which of the following means is the most suitable for data with more than one period?

1. Weighted mean.
2. Arithmetic mean.
3. Geometric mean.

Solution

The correct answer is C.

The geometric mean is mostly used when calculating the mean of data with more than one period.

A is incorrect. The weighted mean is suitable for data where each observation has different weights.

B is incorrect. Arithmetic mean is suitable for single-period data.