Variance and the inequality of arithmetic and geometric means
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Abstract: The classical AM-GM inequality has been generalized in a number of ways. Generalizations which incorporate variance appear to be the most useful in economics and finance, as well as mathematically natural. Previous work leaves unanswered the question of finding sharp bounds for the geometric mean in terms of the arithmetic mean and variance. In this paper we prove such an inequality. A particular consequence is easily described: among all positive sequences having given length, arithmetic mean and nonzero variance, the geometric mean is maximal when all terms in the sequence except one are equal to each other and are less than the arithmetic mean.
In this paper, the author derived and proved in Theorem 1.2 that the bounds for the geometric mean solely depends on the arithmetic mean and the variance. In addition, it was shown that these mean-variance bounds are sharp. Applications of the derived results to finance was given and the author concludes that before an initial investment is made it is important that the investor should estimate the mean and variance of the returns for the asset from its historical performance records.
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