Weighted average return measures the performance of a stock portfolio by taking into account the amount of capital invested in each asset. It is calculated by multiplying the rate of return and percentage of the portfolio for each asset and adding them together. This provides a more accurate measure of portfolio performance than simply averaging the returns of each individual asset.
Weighted average return is a method of measuring the performance of a stock portfolio that takes into account how much capital is placed in each investment. Since more money can be placed in certain assets than others, it makes sense that these assets would have a greater 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 that it encompasses. Multiplying these two percentages for each asset and then adding them all together will give the weighted average.
Investors are generally interested in how the different securities they put their money in are performing. Ultimately, what matters most is how your entire portfolio performs. This can be difficult to measure if these different securities have various amounts of money placed on them. Fortunately, investors can use a measurement known as the weighted average return as a way to judge the performance of an entire portfolio at once.
As an example of how the weighted average return works when judging an investment portfolio, imagine that an investor has put money into three different stocks. He bought $1,000 in A-shares, $1,500 in B-shares, and $2,500 in C-shares. At the end of the year, A-shares gained four percent, B-shares gained five percent, and C shares gained by six percent.
Simply adding the three win percentages and dividing by three leaves an arithmetic mean of five percent on the rates of return. That doesn’t take into account the fact that C shares accounted for half of the entire portfolio, while A and B shares combined for the other half. The weighted average return explains this by first looking at how much of the portfolio each stock comprises. In this case, share A was 20 percent, or $1,000 of a total of $5,000, share B was 30 percent, and share C was 50 percent.
Knowing these totals, the weighted average return can now be calculated by multiplying the percentage of the portfolio each stock occupies by the rate of return for each. For Stock A, it’s 0.2 times the four percent yield, or .8. The other two totals are five percent multiplied 0.3 for Action B, or 1.5, and six percent multiplied 0.5 for Action C, or 3.0. Adding all of these totals produces a weighted average of 5.3 percent, which is a truer indicator of portfolio performance than the arithmetic mean of individual returns.
Smart Asset.
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