A mathematical process by which figures and/or components are adjusted to reflect importance by value or proportion. A weighted average, for example, takes into account the proportional relevance of each component, instead of measuring each individual component equally. For example, the Dow Jones Industrial Average (DJIA) is a price-weighted average that compares each security based on the stock's price relative to the sum of all the stocks' prices. The Nasdaq, on the other hand, is a market capitalization weighted index, where each company is measured relative to its market value.
Where the DJIA and Nasdaq indexes utilize weighting in their calculation to more closely approximate the effect that changing stock prices will have on the overall market, weighting can also be used to help evaluate the past and current prices of individual instruments through technical analysis.
Emphasis can be placed on the more pertinent data through weighting; this method is used frequently in the investing and accounting world. A weighted moving average, for example, places additional emphasis on the most recent data, thereby providing a better view of current market activity. Similarly, a weighted alpha measures how much a stock has risen or fallen over a certain period, placing more emphasis on recent activity. Since more focus is placed on the current period, the calculation provides a more relevant measure for short-term analysis. Other weighted metrics include weighted average cost of capital, weighted average coupon, and time weighted average annual rate of return.