This technique calculates a median that offers extra weight to values protecting longer intervals. For instance, if a portfolio’s return is 10% over one 12 months and 5% over the next three years, the common return is not merely (10% + 5%) / 2 = 7.5%. As a substitute, the three-year interval receives proportionally extra weight, leading to a decrease weighted common that extra precisely displays efficiency over your entire four-year span. This method usually entails geometric linking of returns to account for compounding.
Its significance lies in offering a more true illustration of efficiency or worth over time, particularly in situations with various durations. This contrasts with a easy common, which could be deceptive when intervals are unequal. Precisely assessing funding portfolio returns, inner charges of return, and even common concentrations of pollution in environmental science advantages from this weighted method. Its historic context traces again to the necessity for fairer and extra consultant efficiency analysis in finance and associated fields.
