What is a weighted average return? (with photo)

The weighted average return is a method of measuring the performance of a stock portfolio that takes into account how much capital is put into each investment.

The weighted average return is a method of measuring the performance of a stock portfolio that takes into account how much capital is put into each investment. Since more money can be put into certain assets than others, it makes sense that those assets would have more of an effect on the performance of a portfolio as a whole. To calculate this number, each asset must be measured in terms of its rate of return and the percentage of the entire portfolio it encompasses. Multiplying these two percentages for each asset and then adding them all together will result in the weighted average.

Investors are often interested in how all the different securities they put their money are doing. Ultimately, what matters most is the performance of the entire portfolio. This can be difficult to measure if these different bonds have various amounts of money put into them. Fortunately, investors can use a measure known as a weighted average return as a way of judging the performance of an entire portfolio at once.

As an example of how the weighted average return works when judging a portfolio of investments, imagine that an investor put money in three different stocks. He bought $1,000 (USD) of stock A, $1,500 of stock B, and $2,500 of stock C. At the end of the year, stock A gained four percent, stock B gained five percent, and stock C won six percent.

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Simply adding up the three percentage gains and dividing them by three results in a five percent arithmetic average in return rates. This does not take into account the fact that stock C accounted for half of the entire portfolio, while stocks A and B combined for the other half. The weighted average return explains this by first looking at how much of the portfolio each stock comprised. In this case, stock A was 20 percent, or $1,000 USD out of a total of $5,000, stock B was 30 percent, and stock C was 50 percent.

Knowing these totals, the weighted average return can now be calculated by multiplying the percentage of the portfolio that each stock takes on by the rate of return on each. For stock A, it’s 0.2 multiplied by the four percent return, or 0.8. The other two totals are five percent multiplied by 0.3 for Stock B, or 1.5, and six percent multiplied by 0.5 for Stock C, or 3.0. Adding all these totals together results in a weighted average of 5.3%, which is a truer indicator of portfolio returns than the arithmetic average of individual returns.

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