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Underweight refers both to the situation when a portfolio holds less of a percentage of a certain asset than the benchmark and to the analyst's forecast for a particular stock or market, when it is likely to not keep pace with other assets. 

Underweight explained

There is a method that allows an investor to evaluate an investment portfolio. Basically, the investment portfolio is a set of assets that are collected in such a way that the income corresponds to the goals of the investor. The basic math skills will help an investor define what percentage of a portfolio is directed towards a certain stock or other securities. In contrast, analysts may define underweight stocks with reference to different variables. 

Underweight portfolio

A portfolio is considered to be underweight if it does not hold sufficient amounts of a particular asset. An investor can compare the managed portfolio against the benchmark portfolio and determine if it is underweight or not. For instance, the benchmark portfolio is made up of 15% of a particular stock, while the managed portfolio holds the stock with a 12% weight. It means that the investor portfolio might receive an underweight rating. 

A specialist that is responsible for making investment decisions can decrease the number of stocks held in a portfolio if he thinks that they will do slightly worse than other assets. For instance, assume that there’s a stock with a weight of 8%. If the specialist thinks that it will perform slightly below par, he can allocate only 5% to the stock. The 3% left can be divided  among other assets to increase the potential returns of the portfolio. 

Underweight stock rating

The "underweight" rating refers to the opinion of a financial analyst that the stock’s return will be below other stocks in its market sector. A stock that has an underweight rating can be identified by analyzing variables chosen by the analyst. The analyst can do research based on a certain index and determine that the stock is underperforming, while another index will indicate that this recommendation is incorrect. 

Due to this concept, individuals who invest capital with the aim of making a profit can make stock market movement predictions. For example, in 2017, hedge funds owned the least amount of Apple shares compared to its weighting in indexes and because of this fact, the shares were deemed to be underweight. Experts came to the conclusion that the shares would continue to rise because fund managers started to purchase them. 

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