Arithmetic index

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Arithmetic Index

An average in which no values count for more than others. That is, an arithmetic index simply adds the value of all data and divides by the number of data points. An arithmetic index is less common than a weighted average; that is, most indices weight for price or market capitalization. However, the Value Line composite index has an arithmetic version.

Arithmetic index.

An arithmetic index gives equal weight to the percentage price change of each stock that's included in the index.

In computing the index, the percentage changes of all the stocks are added, and the total is divided by the number of stocks. The percentage price changes of large companies aren't counted more heavily, as they are in a market-capitalization weighted index.

An arithmetic index is a more accurate measure of total stock market performance than an index that stresses relatively few high-priced or large-company stocks. However, some analysts point out that it may also produce higher total return figures than other indexing methods.

The best known arithmetic index in the United States is the one computed by Value Line, Inc., which tracks the approximately 1,700 stocks. Standard & Poor's also calculates an arithmetic version of the S&P 500 index.