Effect of Compounding The arithmetic mean does not take into account the impact of compounding, and therefore, it is not best suited to calculate the portfolio returns. The geometric mean takes into account the effect of compounding, therefore, better suited for calculating the returns.
Accuracy The use of Arithmetic means to provide more accurate results when the data sets are not skewed and not dependent on each other. Where there is a lot of volatility in the data set, a geometric mean is more effective and more accurate. Application The arithmetic mean is widely used in day to day simple calculations with a more uniform data set.
It is used in economics and statistics very frequently. 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. The arithmetic mean has applications in daily life when observed.
In the fields of anthropology , history, statistics, to calculate per capita income, etc, the average is of foremost importance. The arithmetic mean has certain limitations because it is just the approximate value and not the exact value.
A geometric sequence is the sequence of numbers where consecutive terms are in common ratio. Simply when the progression is multiplied or divided by the same, non-zero number then the sequence obtained is called geometric. This progression can be depicted as a, ar, ar 2 , ar 3 , ar 4 and so on where a is the 1 st term and r is the common ratio.
Geometrical sequences seem a bit more complex to figure out than the arithmetic mean but still have numerous uses in day to day works for example in calculating the growth rates, stock markets, interest rates, etc. The arithmetic mean is derived by dividing the sum of the collection of terms by the total number of terms in the series whereas the geometric sequence is derived by multiplying or dividing the successive terms with the common ratio.
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 arithmetic mean has a severe effect of outliers. In the dataset 11,13,17 and , the average is
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