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Definition of 'Arithmetic Index'
An index of securities that uses an arithmetic sum to determine changes in the index without taking the relative size of the securities into account. An arithmetic index of stocks does not incorporate weightings based on market capitalization, price, or any other metric, but merely calculates the raw changes in each component, then divides the sum by the number of index components.
Also known as an "unweighted index".
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Investopedia explains 'Arithmetic Index'
Most stock indexes are market-cap weighted, which means that the largest companies will exert a larger influence on the index that the smallest. The Standard & Poor's 500 Index and the Nasdaq-100 are both market-cap weighted, while the Dow Jones Industrial Average (DJIA) is price-weighted. The Value Line index is calculated arithmetically, although few other major indexes fail to account for the size of their components in some way.
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