By James Bell
The portfolio weight refers to the percentage that an investment is compared to the aggregate total of the portfolio. We can look at a portfolio by its weights and we can use these weights for further portfolio analysis which we do here. Because we are dividing a value by the total, we are finding a ratio or proportion of one investment to the total of all investments within a group. This group is what we call a portfolio, a collection of investments that comes in many different flavors and sizes.
where
Portfolio Weight
Value of Investment
Total Value of Portfolio
This is what we are looking for. We will use this variable to help us calculate the return on the portfolio. Weights are something we use in many calculations in finance and probability. Another example of where we use weights is in the Weighted Average Cost of Capital.
The value of the investment is the price per share x the number of shares we invest in. If you buy 10 shares at 50 and that’s the value of your investment.
This is the aggregate sum of everything in our portfolio. This is the total that we use to define our weight as a percentage. Through division, we are looking at a percentage of the whole and the Total Value of a Portfolio is our total amount. If we use the same formula with only percentages, this denominator would be 100%.
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