What’s the actually difference in using: Arithmetic, Geometric, Weighted, and Harmonic Mean? I know the calculations and Harmonic > Geometric > Arithmetic, but what reason is there to use either one of those avg’s if for example you purchase an unequal amt of shares of stocks and put it all in a portfolio,i.e., why choose Arithmetic over Harmonic?
Harmonic < Geometric < Arithmetic Harmonic - It’s like dollar cost averaging. Geometric - Mean with compounding included. Arithmetic - Mean without coumpounding, most popular since it is the highest and simplist to calculate.
Thanks for fixing the less than greater than. But can you explain the reasoning why we use these different methods?
Harmonic is used by brokers. If someone dollar costs average, buy’s into a mutual fund with the same dollar amount each month, the weighted cost/share will be less than the average cost over the year. Geometric is used for multiple reporting periods and it includes compounding. Arithmetic is good to use for a single reporting period. It is the most common by investment professionals since it is higher than the other two and simpler to compute. This is the jist you’ll need to know. Also know time weighted return vs. money weighted return.