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Weighted Average

The weighted average is the average of numbers with assigned weights.

The weighted average is the average of numbers with assigned weights. Each number may have an assigned pre-determined weight based on its importance, or a specific value may act as a weight.

To calculate the weighted average, you first need to multiply each number with its weight and then sum up the value. Divide the derived value by the sum of the numbers to arrive at the weighted average.

For example, An IPO receives various bids at below price levels.

IPO Shares Bidding

Shares

Bid Price

No. of shares * Bid Price

500

55

27500

400

50

20000

1000

45

45000

300

40

12000

2200

47.5

104500

(B)

Weighted average (A/B)

(A)

Let us assume that the number of shares acts as the weight assigned to each bid price. Hence to derive the weighted average,

  1. Let us multiple No. of shares with bid price and derive its total. (A)
  2. Add the no. of shares. (B)
  3. Divide A by B

Note: The above calculation is to give an example of how a simple weighted average works. The lead manager and the issuer company may use a set of specific weights for their calculation. Thus, their price derivation may differ from the above.

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