What Does Weighted Average Mean?

An average in which each quantity to be averaged is assigned a weight. These weightings determine the
relative importance of each quantity on the average. Weightings are the equivalent of having that many
like items with the same value involved in the average.

Investopedia explains Weighted Average

To demonstrate, let's take the value of letter tiles in the popular game Scrabble.

Value:              10    8    5    4      3    2     1     0

Occurrences:    2     2    1    10    8    7    68    2  

To average these values, do a weighted average using the number of occurrences of each value as the
weight. To calculate a weighted average:

1. Multiply each value by its weight. (Ans: 20, 16,  5, 40, 24, 14, 68, and 0)
2. Add up the products of value times weight to get the total value. (Ans: Sum=187)
3. Add the weight themselves to get the total weight. (Ans: Sum=100)
4. Divide the total value by the total weight. (Ans: 187/100 = 1.87 = average value of a Scrabble tile)

Definition
An average that takes into account the proportional relevance of each component, rather than treating
each component equally.

Weighted Average differs from a regular average because calculation of the average is affected by volume. Some
common applications are:

 Calculating product costs or revenue from assorted groups of products

 Determining the yield across a portfolio of mixed investments

 Infinite applications for scientific data

The use of weighted averages is common in many different applications, especially in the fields of accounting
and various tasks that involve analysis and mathematical evaluations. Essentially a weighted average involves
the assignment of different levels of importance or weights to various components that are used to arrive at a
final answer or solution to a question or problem. This is in contrast to the practice of assigning a common
mean value to each component that is relevant to the task at hand.
One of the easiest ways to understand the concept of a weighted average is to look at a common grading
model used in many schools and colleges.

At the discretion of the instructor, different types of work performed by the student will be assigned a value that
will help determine the final grade earned for the course. Successful completion of homework assignments may
account for a smaller percentage of the total grade, while one or two major tests may carry additional weight in
the final grade earned. This concept of proportional relevance means that in the greater scheme of things, the
tests carry more importance in making a good grade for the course, although the successful completion of both
components will ensure earning the highest grade.

This same principle of a weighted average can be applied in other venues as well. Marketing strategists may
develop a campaign that is aimed at primary and secondary consumer markets. While the main thrust of the
campaign is directly relevant to the primary market, the same techniques are anticipated to be relevant to
lesser degree to other markets. The result is a projection of revenue earned primarily from one sector of the
consumer market, but still accounting for smaller percentages of revenue from one or more smaller sectors.

A weighted average is somewhat subjective, in that the individual or entity who sets the values for each
component involved in the average usually does so with some preconceived ideas about those values.
However, it is possible to adjust the criteria used for calculating a weighted average as more facts emerge that
could impact the relative value of each component.

Mean in which each item being averaged is multiplied by a number (weight) based on the item's
relative importance. The result is summed and the total is divided by the sum of the weights.
Weighted averages are used extensively in descriptive statistical analysis such as index numbers. Also
called weighted mean.