49. Weighted average Thus far, we have assumed that each value has equal weight, or importance, but that is not always the case. Suppose a stock is expected to have a return of either 2%, 8%, or 35%. The simple, arithmetic average is This assumes each possible return has an equal probability of occurring (probability = 1/3). However, what if the first two returns are twice as likely as the last to occur? We have to assign weights to each possible return. Weight Return 2/5 2% 2/5 8% 35% 1/5 The "weighted average" is calculated by multiplying each possible outcome by its corresponding weight and summing the results. Weighted Average - 3 w, x, Weighted Average The weighted average of this example is Check Your Understanding Suppose you own some shares of Gordon Enterprise's stock. Gordon's stock has produced these returns over the past four years: Year Return 7% 2 -4% 39% 4 33% The average measures the average return over the past four years and is while the average of better reflects the change in the stock's value each year. 49. Weighted average Thus far, we have assumed that each value has equal weight, or importance, but that is not always the case. Suppose a stock is expected to have a return of either 2%, 8%, or 35%. The simple, arithmetic average is This assumes each possible return has an equal probability of occurring (probability = 1/3). However, what if the first two returns are twice as likely as the last to occur? We have to assign weights to each possible return. Weight Return 2/5 2% 2/5 8% 35% 1/5 The "weighted average" is calculated by multiplying each possible outcome by its corresponding weight and summing the results. Weighted Average - 3 w, x, Weighted Average The weighted average of this example is Check Your Understanding Suppose you own some shares of Gordon Enterprise's stock. Gordon's stock has produced these returns over the past four years: Year Return 7% 2 -4% 39% 4 33% The average measures the average return over the past four years and is while the average of better reflects the change in the stock's value each year