Weighted mean

Definition

A weighted mean is an average where each data point is multiplied by a predetermined weight before summing and dividing by the total of the weights. It gives more significance to some data points based on their importance or frequency.

5 Must Know Facts For Your Next Test

1. Weighted mean accounts for varying levels of importance among data points.
2. To calculate a weighted mean, multiply each value by its corresponding weight, sum these products, and divide by the total sum of weights.
3. It is commonly used in finance to calculate average returns when different investments have different amounts invested.
4. The weighted mean reduces skewness caused by outliers in datasets where some values are inherently more significant.
5. In portfolio management, the expected return of a portfolio can be calculated using the weighted mean of individual asset returns.

Review Questions

• What distinguishes a weighted mean from a simple arithmetic mean?
• How do you calculate the weighted mean of a dataset?
• In what scenario might you use a weighted mean in financial analysis?

Related terms

Arithmetic Mean: The sum of all values divided by the number of values.

Median:

The middle value in a dataset when it is ordered from least to greatest.

Mode:

The value that appears most frequently in a dataset.