- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 2. Security Market Indexes
- Subject 2. Index Construction and Management
CFA Practice Question
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 ______.
Correct Answer: 6
After the split, the price of B will change to 12/3 = $4 per share. If a direct price-weighted average is taken, the index value after the split will be (8+4)/2 = 6. Note that before the split, the index value is (8+12)/2 = 10. Thus, a simple split will cause a price-weighted index to jump down unless the divisor is changed to keep the index constant.
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. |