Unweighted Index

AAA

DEFINITION of 'Unweighted Index'

A simple arithmetic or geometric average used to calculate stock indexes. Equal weight is invested in each of the stocks in an index with equal dollar amounts invested in each underlying stock. Because the stocks are equally weighted, one stock's performance will not have a dramatic effect on the performance of the index as a whole. This differs from weighted indexes, where some stocks are given more weight than others, usually based on their market capitalizations.

INVESTOPEDIA EXPLAINS 'Unweighted Index'

As an example of how to calculate an arithmetic average, suppose that there are three stocks in an index with returns of 10%, 11% and 15%. The arithmetic return would be calculated as follows:

(0.10+0.11+0.15)/3 = 0.1200 =12%

In other words, you add the returns of each of the stocks in the index and divide this figure by the total number of stocks in that index.

To calculated a geometric average, suppose again that there are three stocks in an index with returns of 10%, 11% and 15%. The geometric return would be calculated as follows:

[(1+0.1)*(1+0.11)*(1+0.15)]^(1/3) = 1.1198 = 11.98%

In this case, you multiply the returns and take the 'n'th (where 'n' equals the number of stocks in the index) root of the product. The geometric average will either be equal to or lower than the arithmetic average.

RELATED TERMS
  1. Index

    A statistical measure of change in an economy or a securities ...
  2. Mean

    The simple mathematical average of a set of two or more numbers. ...
  3. Weighted

    A mathematical process by which figures and/or components are ...
  4. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  5. Capitalization-Weighted Index

    A type of market index whose individual components are weighted ...
  6. Weighted Average Market Capitalization

    A stock market index weighted by the market capitalization of ...
Related Articles
  1. An Introduction To Stock Market Indexes
    Investing Basics

    An Introduction To Stock Market Indexes

    Investopedia explains the five most talked about indexes and what makes them all different.
  2. Mutual Funds & ETFs

    4 Steps To Building A Profitable Portfolio

    This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation.
  3. Mutual Funds & ETFs

    Which Mutual Fund Market Cap Suits You?

    Different funds invest in companies with different market caps. Find out which is right for you.
  4. Investing

    How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S. market index that gives investors an idea of the overall movement in the U.S. equity market. The value of the S&P 500 constantly changes based on the movement of ...
  5. Personal Finance

    What is the average salary for an accountant?

    Learn about the average salaries of various accounting positions, and see the difference that an accounting degree makes in attaining higher wages.
  6. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  7. Economics

    Is the Bureau of Labor Statistics accurate?

    Read this brief analysis of the accuracy of Bureau of Labor Statistics, including a summary of the types of reports issued and how they are compiled.
  8. Economics

    Where is cost of living lowest in the world?

    Learn how the cost of living is the lowest in India based on numbers derived from the CPI and organizations like Expatistan and Numbeo.
  9. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  10. Explain the logic behind government loans, how they work, why are they so big in the U.S and how they have an influence in the economy of the U.S and potentially abroad
    Economics

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center