We must multiply each number by its respective weights to start the solution. When there are numerous factors to consider and assess, the weighted average, also known as the weighted mean, helps to make a decision. The weighted average is determined by applying various weights to each component according to their respective relevance. The weighted average gives each of the different quantities a specific weight. The weights are essentially numerical expressions expressed as percentages, decimals, or integers; they do not correspond to any physical units. When the numbers in a data collection are given the same weight, a simple average can be less accurate than a weighted average.

What is the weighted average?

A weighted average accounts for the relative contribution, or weight, of the things being averaged, while a simple average does not. The geometric mean offers a specialized solution for scenarios involving exponential growth or decline. By taking the nth root of the product of n values, geometric means give equal weight to the relative percentage changes between values. This makes them particularly useful in finance for calculating compound interest rates or in epidemiology for analyzing disease spread rates. Weighted averages are used in many areas of finance and business besides the purchase price of shares, including portfolio returns, inventory accounting, and valuation. One downside of a weighted average is the potential for subjectivity in determining the weights assigned to each data point.

Weighted Average vs. Arithmetic vs. Geometric

About the data below, calculate, on average, how much an employer pays an employee an hour of work. Let us arrange the data in a table and use the decimal value as the weighing factor. The first column indicates the time you spent traveling to school, which are 15 minutes, 20 minutes, 25 minutes, and 30 minutes. Once you have arranged your data, multiply each number by the correct weighing factor. Natural gas traders are often interested in the volume-adjusted average price of gas in a particular region. Weighted averages provide a tailored solution for scenarios where certain data points hold more significance than others.

When Are Weighted Averages Used?

A weighted average can be considered to be more accurate than any simple average, as all the numbers in the set of data are assigned with identical weights. Let us explore the topic of weighted average, by understanding what is the meaning of weighted average, real-life examples, and solve a few examples using the formula. A weighted average, otherwise known as a weighted mean, is a little more complicated to figure out than a regular arithmetic mean.

• Finding the weighted average is different compared to finding the normal average of a data set.
• When some quantities are more important than the others and do not contribute equally to the final result thus multiplying them to a coefficient is called weighted average.
• This method also assumes that a business will sell all of its inventory at the same time.
• This is so that the income is high, and the costs recorded are low.
• Numbers multiplied by a weight (based on relative importance), summed, divided by the sum of weights.

WACC is weighted based on the market value of debt and equity in a company’s capital structure. Next, weighted averages are particularly useful for handling skewed distributions or outliers within a dataset. Instead of being overly influenced by extreme values, weighted averages take into account the relative importance of each data point. This means you can “manipulate” how to choose the best personal finance software and apps your data set so it’s more relevant, especially when you don’t want to consider extreme values. However, values in a data set may be weighted for other reasons than the frequency of occurrence. For example, if students in a dance class are graded on skill, attendance, and manners, the grade for skill may be given greater weight than the other factors.

The teacher also gives weights to each category to create a final evaluation of the student’s performance. The weights assigned to each criterion help the instructor in her student assessments. For example, you want to calculate the average time you spend traveling to school for 20 days.

Each number in a data set is multiplied by a predetermined weight value during the calculation of the weighted average. The final step is to add these two values together and divide it by the number of research participants, giving us the weighted average. Here, we’ll give you examples of weighted average calculations with real numbers to provide insight into the exact process.

This will help him in making the best decision while buying the product. Whether a weighted average is better depends on the specific context and the objectives of your analysis. Weighted averages are better when different data points have varying degrees of importance, allowing you to have a more nuanced representation of the data. However, they may introduce subjectivity in determining weights and can be sensitive to changes in the weighting scheme.

This step gives you a series of products that represent the weighted contribution of each value. The table below shows the frequency with which he rides a certain number of minutes in a given day over the course of 28 days. So, having an A from an exam and a C from a quiz, you’d get a B as a standard average, but assuming that the exam is two times more important, you should get a B+. Therefore, your travel time to school averages 21.50 minutes for 20 days.