Law Of Large Numbers

In statistical terms, a rule that assumes that as the number of samples increases, the average of these samples is likely to reach the mean of the whole population. When relating this concept to finance, it suggests that as a company grows, its chances of sustaining a large percentage in growth diminish. This is because as a company continues to expand, it must grow more and more just to maintain a constant percentage of growth.

As an example, assume that company X has a market capitalization of $400 billion and company Y has a market capitalization of $5 billion. In order for company X to grow by 50%, it must increase its market capitalization by $200 billion, while company Y would only have to increase its market capitalization by $2.5 billion. The law of large numbers suggests that it is much more likely that company Y will be able to expand by 50% than company X.

The law of large numbers makes logical sense. If a large company continues to grow at 30-50% every year, it would eventually become bigger than the economy itself! Obviously, this can't happen and eventually growth has to slow down. As a result, investing in companies with very high market capitalization can dampen the potential for stock appreciation.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Law of large numbers — The law of large numbers (LLN) is a theorem in probability that describes the long term stability of the mean of a random variable. Given a random variable with a finite expected value, if its values are repeatedly sampled, as the number of these …   Wikipedia

  • law of large numbers — Math. the theorem in probability theory that the number of successes increases as the number of experiments increases and approximates the probability times the number of experiments for a large number of experiments. [1935 40] * * * ▪ statistics …   Universalium

  • law of large numbers — noun (statistics) law stating that a large number of items taken at random from a population will (on the average) have the population statistics • Syn: ↑Bernoulli s law • Topics: ↑statistics • Hypernyms: ↑law, ↑ …   Useful english dictionary

  • law of large numbers — didžiųjų skaičių dėsnis statusas T sritis fizika atitikmenys: angl. law of large numbers vok. Gesetz der großen Zahlen, n rus. закон больших чисел, m pranc. loi des grands nombres, f …   Fizikos terminų žodynas

  • law of large numbers — law′ of large′ num′bers n. math. the theorem in probability theory that the number of successes increases as the number of experiments increases and approximates the probability times the number of experiments for a large number of experiments •… …   From formal English to slang

  • law of large numbers — noun The statistical tendency toward a fixed ratio in the results when an experiment is repeated a large number of times; law of averages …   Wiktionary

  • law of large numbers — Date: 1911 a theorem in mathematical statistics: the probability that the absolute value of the difference between the mean of a population sample and the mean of the population from which it is drawn is greater than an arbitrarily small amount… …   New Collegiate Dictionary

  • Law of large numbers — The mean of a random sample approaches the mean ( expected value) of the population as the sample grows. The New York Times Financial Glossary …   Financial and business terms

  • law of large numbers — The mean of a random sample approaches the mean ( expected value) of the population as sample size increases. Bloomberg Financial Dictionary …   Financial and business terms

  • law of large numbers — any of several theorems dealing with the convergence of the sample average to the population mean as the sample size is increased …   Medical dictionary

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