Weighted Average

Weighted Average

An average in which some values count for more than others. For example, if an index consisting of 10 stocks is weighted for price, this means that the average price of the stocks will move more when the stocks with higher price move. Most indices use weighted averages so that "smaller" values do not affect the index inordinately. This helps correct for the fact that averages tend to be affected by extreme values. One of the most common ways of weighting an average is to weight for market capitalization.

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Weighted Average

What Does Weighted Average Mean?

An average in which each quantity that is being averaged is assigned a weight. The weightings determine the relative contribution of each quantity to the average. Weightings are the equivalent of having that many like items with the same value involved in the average.

Investopedia explains Weighted Average

To demonstrate this concept, take the value of letter tiles in the game Scrabble.

Value: 10 8 5 4 3 2 1 0

Occurrences: 2 2 1 10 8 7 68 2

To average these values, do a weighted average by using the number of occurrences of each value as the weight. To calculate a weighted average, do the following: Step 1: Multiply each value by its weight. (Answer: 20, 16, 5, 40, 24, 14, 68, and 0.) Step 2: Total all the values from Step 1. (Answer: sum = 187.) Step 3: Total the occurrences (weights). (Answer: sum = 100.) Step 4: Divide the total of the values by the total occurrences (weights). (Answer: 187/100.) Step 5: The average value of a Scrabble tile is 187/100 = 1.87.

Related Terms:
• American Stock Exchange—AMEX
• Dow Jones Industrial Average—DJIA
• New York Stock Exchange—NYSE
• Price-Weighted Index
• Weighted Average Market Capitalization