a bit confused as to how a stock split affects a price weighted index. i read somewhere that, the stock split doesnt affect the numerator of the index, just the divisor. since the price changes after a stock split .
Suppose that you have three stocks: A, B, and C. Their share prices are:
- A: $10/share
- B: $20/share
- C: $100/share
The index value is 100, so the divisor is:
($10 + $20 + $100) / d = 100
$130 = 100_d_
d = $1.30
Suppose that stock C undergoes a 4:1 split. Its new share price is $25/share, and the new divisor is:
($10 + $20 + $25) / d = 100
$55 = 100_d_
d = $0.55
The index value doesn’t change (it’s still 100), but the divisor decreases from $1.30 to $0.55.
thanks so much. i get it now.
I’m so glad to hear that.
Best of luck on the exam!