# Price-weighted index question

Stock…# of shares O/s…Price A…1 mm …10 B…5 mm…20 C…6 mm…60 If stock C completes a 2-for-1 stock split, the value of the index after the split will be close to: A. 20 B. 30 C. 97 D. 157

before 10+20+60 / 3 = 30 After split 10 + 20 + 30 / x = 30 x is recalculated. This was a trick question – it would be the value before… 30

they ask about the value of the index and not the divisor. as cpk stated, a trick question.

Price Weighted Indexes (such as DJIA) are kept to their true levels after stock-splits, by adjusting the divisors, so the effective change in the decrease of the price of the stock (after split) would be nullified by an increase in the denominator . The Index stays where it should stay … at level 30… I’ll go with B too?

B

questions like these are what will do me in, i’ll forget to see what they are really asking for in my hurry. gotta slow down…

B price index values never change because stock split. The denominator used to calculate the index will adjust to make it the same as before.

niraj…totally agree with you man… I just rushed through the question and picked 20. Good job guys.

Divisor Change for Dow Jones Industrial Average As a result of the following action, the Dow Jones Industrial Average (DJIASM) will be calculated with a new divisor effective at the open of trade on trade date April 2, 2007. The price adjustment of Altria Group Inc. (MO) due to a distribution of Kraft Foods Inc. (KFT) shares will be effective for the open of trade on trade date April 2, 2007. As a result, the new divisor for the DJIA is: 0.123051408 Effective with the opening of trading on April 2, 2007, the number of significant digits used to calculate the Dow Jones Industrial Average will be increased to nine.

DAMN, i had no idea! i picked 20 aswell… so, price index divisor will adjust so that the index remains the same after a stock-split? is this the same for market-weighted indexes too? (wait, for market-weighted indexes, the market weight doesnt actually change during stock splits aye?..so the index also remains the same?)

this question got me too!! i totally agree that questions like that are going to do me in…i

at least we’ve seen them (and thought about them) now, rather than in a few days time =)

By adjusting the divisor for a price weighted index…does this place downward bias on price weighted indices?? wihch type of weightings exhibit a downward bias…i remember a question of the sort arising on one of the sample tests