Mean, median and mode

Averages are used all the time in finance, usually to justify performance (‘above average’). However, as an investor, you should realise there are several ways to calculate an average.

The three most common are the mean, median and mode. Let’s say you have five FTSE 100 readings on consecutive days. They are 4,800, 4,900, 4,700, 4,800 and 5,100. The mean is the sum of the five readings divided by the number of readings, so (4,800+4,900+4,700+4,800+5,100) divided by five. That’s 4,860. One of the problems is that extreme outliers can give a misleadingly high or low figure.

The median is the reading in the middle when all the data are ranked in ascending order. So looking at our figures, that’s 4,800. You can use the median to test the mean – if the two are close together, the mean can be taken as representative and not unduly distorted by outliers.

Finally, there’s the mode – the most common reading. In this example, that’s also 4,800.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.