Averaging financial ratios

José Dias Curto and Pedro Serrasqueiro

Finance Research Letters, 2022, vol. 48, issue C

Abstract: Ratios represent a special kind of relation between two magnitudes, and computing the average of ratios is fairly common among academics and Finance practitioners. How should price-to-earnings (P/E) ratios be aggregated (averaged) at the portfolio level to provide a unified number? The arithmetic mean is the natural alternative. However, in case of financial ratios, it is generally accepted that the much less familiar harmonic mean may be more valuable, because it solves the upward bias encountered when using arithmetic mean. However, and to the best of our knowledge, there is no statistical evidence to show the superiority of the harmonic mean when computing the average of ratios. In this paper, by bootstrapping P/E ratios and earnings yield of companies listed in eight common stock indices, we compare the traditional averages and it is shown that geometric, not the harmonic average, as it is commonly accepted, is more suitable to average the ratios.

Keywords: Central tendency; Geometric average; Bootstrapping (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612322002458
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322002458

DOI: 10.1016/j.frl.2022.103000

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().