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Weighted Average

A weighted average is a calculation that takes into account the relative importance or weight of each value in a dataset. In this method, different values are multiplied by their assigned weights, and the sum of these products is divided by the total of the weights. This type of average gives more importance to certain values based on their relevance, frequency, or size, and is commonly used in finance, especially in portfolio management and calculating weighted average cost of capital (WACC).

Example

A portfolio’s weighted average return might give more importance to a stock that constitutes 50% of the portfolio compared to a stock that makes up only 10%, reflecting the greater impact of the larger holding.

Key points

• A calculation that assigns different weights to values based on their importance or relevance.

• Often used in finance, such as in portfolio management or calculating weighted average cost of capital (WACC).

• Provides a more accurate representation of data when certain values carry more significance.

Quick Answers to Curious Questions

A weighted average gives more importance to certain values based on their relevance or size, while a simple average treats all values equally.

Weighted averages are used to calculate portfolio returns, weighted average cost of capital (WACC), and other financial metrics that account for the relative importance of different assets or components.

It helps investors understand the impact of larger positions or higher-weighted assets on the overall portfolio performance.