(2) The three-year arithmetic average interest rate is (5+5.5+6.2)%/3=5.5667%.
The geometric average interest rate for three years is [(1+5%) (1+5.5%) (1+6.2%)] (1/3)-1= 5.5655%.
Arithmetic average is a simple number addition and then divided by the number of periods n, while geometric average is to multiply the interest rates of each period and then open the product to the power of n.
The significance is mainly to consider the statistical accuracy, and the geometric average interest rate is more scientific and accurate. The accuracy of arithmetic average is poor, especially when the figures in each period are relatively large. For example, if you change the yield of each period to 50%, -50% and 60%, then the arithmetic average we calculated will become 20%. What is it actually? Do you really get a 20% return on your three-year investment? Look at the geometric average algorithm: (1.5 * 0.5 *1.6) (1/3) = 6.27%, which is quite different. Then you can know which algorithm is accurate.