We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Weighted Average Rating Factor?

John Lister
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A weighted average rating factor is a method of calculating and communicating the overall risk of a portfolio of investments. It is most commonly associated with collateralized debt obligations. The weighted average rating factor takes into account each individual asset in the portfolio, but gives emphasis based on the relative proportion of the portfolio made up by each asset.

The main use of a weighted average rating factor is with collateralized debt obligations. These are financial products where the rights to income from multiple loans and credit deals have been bought up and packaged together. Investors then buy bonds in the CDO, with the repayments and interest from the bonds ultimately coming from the income from the original loans. There are two main benefits to this system: tying multiple loans together limits the damage caused by a single borrower defaulting; and the bonds can be issued in a way such that investors can choose a particular balance between getting a higher rate of interest or having a priority claim in the event that defaults mean there isn't enough money to pay all bondholders.

With so many loans packaged together, it can be difficult to assess the overall risk of default on a particular CDO and its range of bonds. The weighted average rating factor is a relatively simple way of achieving this. It involves first assigning a risk factor to each individual asset: in effect, an attempt to predict the statistical likelihood of the relevant borrower defaulting.

These risk factor figures are then averaged using weighting. This means adjusting the figures to match the proportions each asset contributes to the overall portfolio. As an extremely simplified example, if 60% of the portfolio is made up of income from mortgage A and 40% is made up of income from mortgage B, then the overall risk factor is simply the risk factor of mortgage A multiplied by 0.4, plus the risk factor of mortgage B multiplied by 0.6.

Exactly what the final weighted average rating factor figure represents may vary depending on who produces the ratings. One system, operated by ratings agency Moody's, uses ratings by which a score of 100 represents a 1% chance of default during 10 years, a score of 150 represents a 1.5% chance, and so on. Investors should check carefully to see exactly what system is being used, particularly when comparing investment options from different providers.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.
Discussion Comments
John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.