Average growth rates
An investment grows 5%, 12%, −3% and 8% over four years. Write each year as a growth factor (1.05, 1.12, 0.97, 1.08). The geometric mean of the factors is about 1.0544, so the average annual growth is 5.44%. The arithmetic mean of the percentages (5.5%) overstates it, because gains and losses compound.
AM ≥ GM
For any positive numbers, the geometric mean is never larger than the arithmetic mean, and they are equal only when all values are the same. The bigger the spread, the bigger the gap. All values must be positive; a zero makes the product zero, and negatives make the root undefined.
Frequently asked questions
How do I calculate the geometric mean of two numbers?
Multiply them and take the square root. The geometric mean of 4 and 9 is √36 = 6.
Why use logs?
Multiplying many values can overflow or underflow a calculator. Averaging the natural logs and then exponentiating gives the same result safely.