What is a Weighted Average? Definition With Example

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Weighted Average Definition

The weighted average is a calculation that takes into consideration the varying levels of significance of the amounts in a data collection. In computing a weighted average, every amount in the data set is multiplied by a predetermined pounds before the final calculation is made.

What is a Weighted Average?

A weighted average could be more precise than a simple typical where all figures in a data group are assigned an equal weight.

Weighted Average

Recognizing Weighted Averages

In computing a simple average or arithmetic mean, all amounts are treated equally and assigned equal weight. However, a weighted average assigns weights which determine beforehand the relative significance of each information point.

KEY TAKEAWAYS

  • A weighted average is sometimes more precise than a simple average.
  • The weighted average takes into consideration the relative importance or frequency of several variables in a data collection.
  • Stock traders utilize a weighted average to monitor the cost basis of stocks bought at varying intervals.

A weighted average is most frequently calculated to equalize the frequency of their values in a data collection. By way of instance, a questionnaire may collect enough answers from each age group to be considered statistically valid, however, the 18-34 age category could have fewer respondents compared to most others relative to their share of the populace. The survey group may weight the outcomes of the 18-34 age category to ensure their perspectives are represented.

But, values in a data collection might be weighted for different motives about the frequency of occurrence. By way of instance, if students in a dancing course are rated on ability, presence, and ways, the caliber for ability might be given higher weight compared to other facets.

Whatever the case, in a weighted average, every data point worth is multiplied by the assigned weight that's then summed and divided by the number of data points.

At a weighted average, the closing average amount reflects the relative significance of each monitoring and is more illustrative than the simple average. Additionally, it has the effect of smoothing the information and improving its accuracy.

Weighted Average
Data PointData Point ValueEncourages WeightData Point Weighted Value
110Two20
1505250
1403120
TOTAL10010390
Weighted Average39

Weighting a Stock Portfolio

Investors generally construct a position in a stock over a span of many decades. That makes it hard to keep tabs on the price basis on these stocks and their relative fluctuations in value.

The buyer can compute a weighted average of the share price. To accomplish this, multiply the number of stocks acquired at every cost by that cost, add these values, and then split the entire value by the entire number of stocks.

What is a Weighted Average?

A weighted average is arrived at by determining ahead of the relative significance of each data point.

By way of instance, say an investor acquires 100 shares of business annually one at $10, and 50 stocks of the same inventory in two at $40. To acquire a weighted average of the cost, the investor multiplies 100 stocks by $10 for year one and 50 stocks by $40 for two and then provides the results to acquire a total of $3,000. Then the entire sum paid for your shares, $3,000 in this circumstance, is split by the number of stocks acquired over the two decades, 150, to receive the weighted average cost paid of $20.

This average is currently weighted related to the number of stocks acquired at every cost, not only the total price.

Cases of Weighted Averages

Weighted averages appear in several regions of funds aside from the cost of stocks, such as portfolio returns, stock accounting, and evaluation.

When a fund that holds multiple securities is up 10 percent annually, that 10 percentage reflects a weighted average of returns to the fund concerning the value of every position from the finance.

For stock bookkeeping, the weighted average value of stock accounts for changes in commodity costs, by way of instance, whilst LIFO (Last In First Out) or FIFO (First In First Out) approaches to provide more significance to time compared to worth.

When evaluating businesses to discern if their stocks are properly priced, investors utilize the weighted average price of funds (WACC) to dismiss an organization's cash flows. WACC is weighted depending on the market value of equity and debt in an organization's capital structure.

What is a Weighted Average?

Related Terms

Standard Deviation

The standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and can be calculated as the square root of this variance. It's calculated as the square root of variance by specifying the difference between each data point relative to the expression.

Moving Average (MA) Definition

A moving average is a technical analysis indicator that will help smooth out cost actions by filtering out the"noise" from arbitrary price changes.

How to figure the Weighted Average Cost of Capital - WACC

The weighted average cost of capital (WACC) is a portion of a company's cost of capital by which each kind of funding is weighted.

Many Popular U.S. Composite Indexes - A Refresher

A composite index is a statistical tool that groups together many distinct stocks or demographics. Composite indicators are supposed to offer a relative measure of the operation of the industry or a particular market sector with time.

S&P 500 Index

The S&P 500 Index or the Standard & Poor's 500 Index is a market-capitalization-weighted indicator of the 500 biggest U.S. publicly traded firms. The indicator is widely considered the best indicator of large-cap U.S. equities.

Dow Jones Industrial Average (DJIA) Definition

The Dow Jones Industrial Average (DJIA) is a favorite stock exchange index that monitors 30 U.S. blue-chip stocks.

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