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. Neither are the percentage price changes of stocks that are selling at higher prices, as they are in a price-weighted index.
While 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, some analysts point out that it may also produce higher total return figures than other indexing methods. The best known arithmetic index in the US is the one computed by Value Line, Inc., which tracks the approximately 1,700 stocks the company analyzes regularly.