Averaging Financial Ratios

08/03/2022 18:30

Poderá rever este seminário no vídeo em baixo ou: AQUI

Orador: Pedro Nogueira Serrasqueiro (ISCTE Business School, Departamento de Métodos Quantitativos - Prof. Auxiliar Convidado)

ABSTRACT:

Ratios represent a special kind of relation between two magnitudes. Averaging ratios is common practice among academics and Finance practitioners, and the arithmetic mean is the natural alternative. However, for financial ratios, it is generally accepted that the much less familiar harmonic mean is more valuable because it solves the upward bias problem encountered while using arithmetic mean and is a more intuitive and logical approach. 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. By bootstrapping P/E ratios and earnings yields of the companies listed in eight large stock indices, we compare the traditional averages and it is shown that the geometric, not the harmonic mean, is more suitable to average ratios.