Morningstar defines the overall "size" of a stock fund's portfolio as the geometric mean of the market capitalization for all of the stocks it owns. It's calculated by raising the market capitalization of each stock to a power equal to that stock's stake in the portfolio. The resulting numbers are multiplied together to produce the geometric mean of the market caps of the stocks in the portfolio, which is reported as average market capitalization.
For example, if a fund currently held equal stakes in three stocks, with market capitalizations of $2 billion, $10 billion, and $25 billion, the geometric mean would equal:
($2 billion1/3) * ($10 billion1/3) * ($25 billion1/3) = $7.94 billion
4Average Market Cap versus Median Market Cap
This number is different from the fund's median market cap--the capitalization of the median stock in its portfolio. The geometric mean better identifies the portfolio's "center of gravity." That is, it provides more accurate insight into how market trends (as defined by capitalization) might affect the portfolio.
The advantage of a median over an average is that the median is not disproportionately affected by one or two extremely large-cap or small-cap holdings. For example, a small-company fund that holds a small position in General Electric for liquidity purposes won't have its market cap unduly skewed by that company's market cap, unless it has a substantial portion of its assets in that stock.