MAD - simple question

CFA Level I Quant
#1

Hi all,

Hoping someone can shed some light on the use of absolute values when calculating the MAD?

I thought it meant to ignore +/- signs on the Xi when calculating the average but have just seen in a Schweser Notes example that they have used the - sign.

See third bracket in the solution -7 is used. If absolute doesn’t mean to ignore +/- signs, can you tell me what it does mean?

Thanks!

What is the mean absolute deviation for XYZ stock returns?

The mean absolute deviation is found by taking the mean of the absolute values of the deviations from the mean.

(|22 – 7.3| + |5 – 7.3| + |–7 – 7.3| + |11 – 7.3| + |2 – 7.3| + |11 – 7.3|) / 6 = 7.33%

#2

It’s the absolute difference from the terms. the distance between (-7, 7) … |-7 - 7| … is going to be 14. You should not ignore the negative signs in calculating the difference between the two points, however ignore the negative sign if the difference is negative, i.e. -7 - +7 = -14. |-14|=14.

#3

U can also get ur mean using calc and use the same in mad calculaftin.use data function and stat function

#4

Perfect! That’s intuitive, thanks for the help both.

AS