Alternatively, one can use a combination of two MS
In the company analysis, the concept helps to determine the weighted average cost of capital (WACC), which is used in equity discounting valuation models.Īlthough the concept is simple, it involves calculations of weightages as the same are not readily available. Moreover, weighted average has applications in stock market averaging, where one can reduce the cost of acquisition of a stock by buying additional shares, when the prices are declining. The values of benchmark indices like BSE Sensex and NSE Nifty are calculated by assigning weights to the constituent stocks according to their market capitalisations. Weighted returns have several applications in stock markets, mutual funds, personal finance investments and company analysis. With a total principal investment amount of Rs 55,000, it led to a loss of Rs 650. The investor made Rs 1,000 in stock 1, Rs 750 in stock 2 and suffered a loss of Rs 2,400 in stock 3, which created a total market value of Rs 54,350. The reason for the negative weighted return is due to the substantial amount of money which was invested in a negative yielding investment option (stock 3). In the above example, the weighted average return works out to -1.2%, compared to a positive 2.3% arithmetic return. The weighted average return is the sum total of the product (or multiplication) of weights that are associated with different investment options and their respective returns. Compared to this, simple average assumes equal weightage of 33% in each of the three stocks.įor estimating returns when amounts vary across investments, a concept called weighted average return is used. Other stock weightages are worked out in a similar manner.
Therefore, in case of stock 1, the weightage is calculated by dividing Rs 10,000 by the total investments of Rs 55,000, which is 18%. The weightage of each stock is calculated by dividing the respective investment amount by the total amount of investments. If Rs 10,000 is invested in stock 1, Rs 15,000 in stock 2 and Rs 30,000 in stock 3, the weightage of 18%, 27% and 55% are created for stock 1, stock 2 and stock 3 respectively. In the example given above, the arithmetic average of 2.3% will turn out to be wrong and misleading, if weightages are unequal. In the area of personal finance and investments, the relevance refers to the varied amounts of investments made, which is technically termed weightages. However, the average return may be ineffective when various investments have different levels of relevance. For example, there are three stocks that have generated 10%, 5% and -8% returns in the past one year and therefore, the arithmetic or average return works out to 2.3%- divided by 3. Average return is the simple average where each investment option is given an equal weightage. Several forms of returns are derived through different mathematical calculations and among these, average or arithmetic return is widely used. Return is defined as the gain or loss made on the principal amount of an investment and acts as an elementary measure of profitability.
#HOW TO CALCULATE EQUAL WEIGHTED STANDARD DEVIATION GENERATOR#
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