It is also used in the education sector to calculate grades. In finance, the weighted average is specifically used for calculating returns on portfolios Investment Portfolios Portfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor's risk profile.
The concept of the weighted average is frequently used in statistics and finance. Hence, the weighted average gives more accurate outcomes and a better understanding of the dataset than the simple average. On the other hand, the simple average assigns equal importance (or weights) to all the data points. The purpose of using the weighted average is to calculate an output that reflects the relative importance of each data point. Further, those values which have been given higher weights have a greater impact on the weighted average compared to values with lower weights. While calculating the weighted average, the weights assigned to the different values may or may not add up to 100%. However, the weight of “quality” being more than “quantity,” employee A has fared better overall. Notice that employee A has been rated high on “quality” of work, while employee B has been rated high on “quantity” of tasks completed. This is because the simple average of employee B (7.5) is greater than that of employee A (6.5). Had we computed the simple average, employee B would have been promoted. read more of employee A (7.4) is greater than that of employee B (6.6), the former gets promoted. Here, more significance is given to the weightage of the values rather than the variables themselves. Since the weighted average Weighted Average The weighted average formula is simply summing up the products of each value with its respective weightage. Likewise, the formula “=SUMPRODUCT(B2:B3,C2:C3)/SUM(C2:C3)” returns 6.6, which is the weighted average of employee B. The formula “=SUMPRODUCT(A2:A3,C2:C3)/SUM(C2:C3)” returns 7.4, which is the weighted average of employee A. Ignore the double quotation marks of the following entries. The employee with the higher weighted average will be promoted.Ĭells A2 and B2 contain “quality” ratings, while cells A3 and B3 contain “quantity” ratings. The former parameter is assigned 80% weight while the latter is allotted 20% weight.įor ease of understanding, we are considering only two employees (A and B). The resulting products are then summed up and divided by the sum of weights.įor example, the organization Z rates (on a scale of 10) every employee on two parameters, “quality” and “quantity” of the projects delivered. To calculate the weighted average, the numerical values are multiplied by the weights. With different weights, the importance (or significance) of each value of the dataset differs. The weighted average is used to calculate the average of numerical values that have been assigned different weights. In Excel, the weighted average is calculated by using the SUMPRODUCT function in the numerator and the SUM function in the denominator.
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