Geometric vs Arithmetic Mean

CFA Level II
#1

Sometimes a vignette suggests that we should use averages out of historical data provided to compute something.

When should we use geometric and arithmetic mean?

#2

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#3

When you are meant to calculate an “average growth rate”, then use geometric mean. This is because geometric mean considers compounding over time.

If you are meant to calculate an average of values (revenues, costs, expenses, quantities sold, dividends, etc), then use arithmetic mean.

#4

thanks for the info

#5

If you’re estimating the return for one period, use the arithmetic mean. If you’re estimating the compound return for more than one period, use the geometric mean.