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Basic Question 13 of 14
A price-weighted index was constructed a month ago using 2 stocks, A and B, then priced at $5 and $7, respectively. The current stock prices of the two are $8 and $12 respectively and stock B is about to undergo a 3-for-1 split. If the divisor is not changed in response to the split, the value of the index immediately after the split will equal ______.
User Contributed Comments 6
| User | Comment |
|---|---|
| zwer | One of the very few open questions here. The answer is in line with the explaination, however a divisor must be defined for the real world index calculation. |
| RichWang | Is 3-for-1 a revise split? that is the price for Stock B will be $12 x 3 = $36. |
| ehc0791 | 1-for-3 is reversed split |
| Rotigga | Remember 3 for 1 means you get 3 shares in exchange for 1 that you have. 1 for 3 means you get 1 share for 3 that you have. |
| Rotigga | Correct divisor would be (4 + 8)/10 = 1.2 [(New Price of B after Split + stock A price)/Original Index Value] |
| johntan1979 | Yup, that's right. 1.2 will be the new divisor, but the question stated no change to divisor. |
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Learning Outcome Statements
describe the choices and issues in index construction and management
compare the different weighting methods used in index construction
calculate and analyze the value and return of an index given its weighting method
describe rebalancing and reconstitution of an index
CFA® 2024 Level I Curriculum, Volume 3, Module 2.