Variance and the Inequality of Arithmetic and Geometric Means

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.