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unweighted arithmetic indices

R

r_v.s

Member
An unweighted arithmetic index is unsuitable because the performance of any investment portfolio will reflect the actual weights – ie market capitalisations – of the constituent investments held within that portfolio, which are unlikely ever to be equal

This may sound silly! But I've not be able to understand this sentence clearly.
Would you plz explain?
 
r_v.s said:
An unweighted arithmetic index is unsuitable because the performance of any investment portfolio will reflect the actual weights – ie market capitalisations – of the constituent investments held within that portfolio, which are unlikely ever to be equal

This may sound silly! But I've not be able to understand this sentence clearly.
Would you plz explain?
Click to expand...

this statement is very simple. It says that when we are measuring the change in any index over time, the calculation of the change will be correct only if we take the changes in every component of the index, and multiply them by the respective weights(here the relative size of that component in that index), and then sum all such component specific weighted changes. When we take simple average, we are assuming that the weights are all same, while actually they never are
 
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