A trimmed mean involves ignoring extreme values to determine a more accurate median figure. This approach can be used in evaluating investments and performance levels, resulting in a more balanced and representative average.
A trimmed mean is a strategy sometimes used to create useful averages. This particular approach typically involves ignoring the most extreme values associated with a given estimate before attempting to determine the median figure for that situation. By essentially discarding the highest and lowest values, it is often thought that the resulting trimmed mean is actually more accurate and useful in terms of making decisions regarding financial investments or business operations.
The actual process of determining a trimmed mean requires that all relevant data be identified, arranging that data in a sequence starting with the smallest or lowest value and progressing to the highest or largest applicable value. A simple example would be to tabulate the scores rendered by the judges during some type of competition. Assuming that there are five judges using a ten-point scale to rate performance levels, arriving at the trimmed mean would mean ignoring the lowest and highest scores, and focusing on the remaining three scores.
Assuming that the judges involved submitted scores of 4, 6, 7, 8, and 9 for a particular performance, identifying the trimmed mean would mean ceasing to consider scores of 4 and 9. From then on, this would mean averaging scores of 6. , 7, and 8 to arrive at a reduced average of 7. By doing so, the process helps to minimize any potential for bias for or against the competitor and arrives at an average score that is considered more balanced and likely a better representation of performance. of that individual.
The same general approach can be used when evaluating the performance of a given investment. By identifying the security price that applies for a fixed number of successive periods, it is possible to ignore the highest and lowest prices, then average the remaining prices to arrive at the average price for the entire time period considered. By not including the lowest and highest prices in the calculation, the investor can ignore unusual circumstances that caused the stock price to plummet or rise in a way that is out of step with that security’s normal return range. . By arriving at the mid-cut price, the investor has a better idea of how that security is likely to perform under typical market conditions and can decide whether to buy, hold or sell that security as a result of the findings and hopefully move closer to achieve your financial goals.
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