Why is geometric mean different from arithmetic

Geometric Mean is known as the Multiplicative Mean. The geometric mean is always lower than the arithmetic means due to the compounding effect. The arithmetic mean is always higher than the geometric mean as it is calculated as a simple average. Suppose a dataset has the following numbers — 50, 75, It is applicable only to only a positive set of numbers. It can be calculated with both positive and negative sets of numbers. Geometric mean can be more useful when the dataset is logarithmic.

The difference between the two values is the length. This method is more appropriate when calculating the mean value of the outputs of a set of independent events. The effect of outliers on the Geometric mean is mild. Consider the dataset 11,13,17 and In this case, is the outlier. Here, the average is The geometric mean is widely used in the world of finance, specifically in calculating portfolio returns.

Ease of Use The arithmetic mean is relatively easy to use in comparison to the Geometric mean. The geometric mean is relatively complex to use in comparison to the Arithmetic mean.

Mean for the same set of numbers The arithmetic mean for two positive numbers is always higher than the Geometric mean. The geometric mean for two positive numbers is always lower than the Arithmetic mean. Conclusion Geometric Mean vs Arithmetic Mean both finds their application in economics , finance, statistics, etc. The geometric mean is more suitable for calculating the mean and provides accurate results when the variables are dependent and widely skewed.

However, an Arithmetic mean is used to calculate the average when the variables are not interdependent. Therefore, these two should be used in a relevant context to get the best results.

This has been a guide to the top difference between Geometric Mean vs Arithmetic Mean. Here we also discuss the Geometric Mean vs Arithmetic Mean key differences with infographics and comparison table. You may also have a look at the following articles to learn more. Submit Next Question. By signing up, you agree to our Terms of Use and Privacy Policy.

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Popular Course in this category. Your Practice. Popular Courses. Financial Ratios Guide to Financial Ratios. Key Takeaways: The geometric mean is most appropriate for series that exhibit serial correlation. This is especially true for investment portfolios. Most returns in finance are correlated, including yields on bonds, stock returns, and market risk premiums.

The longer the time horizon , the more critical compounding becomes, and the more appropriate the use of the geometric mean. For volatile numbers, the geometric average provides a far more accurate measurement of the true return by taking into account year-over-year compounding. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

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Partner Links. Annualized total return gives the yearly return of a fund calculated to demonstrate the rate of return necessary to achieve a cumulative return. Arithmetic Mean Definition The arithmetic mean is the sum of all the numbers in the series divided by the count of all numbers in the series.

Present Value of an Annuity Definition The present value of an annuity is the current value of future payments from that annuity, given a specified rate of return or discount rate. Understanding the Harmonic Mean The harmonic mean is an average which is used in finance to average multiples like the price-earnings ratio.

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