Arithmetic Mean: Definition, Formula & Example

Understand

Arithmetic mean is the average of specified numbers, it is calculated by dividing a sum of all the values in a list to a number of values in that list for getting average or mean of the list of numbers.

For example, the average of the numbers 10, 12 and 8 is 10 which is calculated by adding the numbers 10, 12 and 8 [30] and divided by the number of values which is 3.

The following is the formula to get the arithmetic mean:

A = S / N

Where,

A = average

S = the sum of numbers in a list

N = the number of values in the list

Example

Being an investor, you want to know the average stock price of a company for last five years:

Year 1 = $50

Year 2 = $45

Year 3 = $55

Year 4 = $62

Year 5 = $65

By using the above-mentioned formula, the average stock price is:

A = (50+45+55+62+65) / 5 = 55.4

Why it matters (Importance)

Arithmetic mean is used by investors to foresight past stock price movements and evaluate stocks. Sometimes, it may not provide the true answer such as let’s suppose in your class, there are five students with their marks in exam 55, 64, 72 and 90. The average of these marks will be 56.2 which does not present what actually attained by students.

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