CFA Practice Question

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CFA Practice Question

The divisor for the Dow Jones Industrial Average (DJIA) is most likely to decrease when a stock in the DJIA ______
A. has a stock split.
B. has a reverse split.
C. is removed and replaced.

User Contributed Comments 7

User Comment
murli DJIA is an price weighted index, which has a downward bias for stock split.
kuan The question is not asking what would cause the DJIA to decrease. But the DIVISOR to decrease!
Since Price Weighted=>sum(StockPrices)/Number of stks. Hence the only possibility for the divisor to decrease is that the number of stk decrease!
Objection?
yly13 Refer to the example of the LOS, it explains that a stock split would DECREASE the divisor.
george2006 stock split --> price down --> divisor decrease to maintain the same index value.

index val= sum(prices)/divisor
Kuki stock split results in number of stocks increasing. this increase results in having to adjust the divisor DOWNWARDS to maintain the same index value. Therefore answer is A.
AkuK so the opposite is true for reverse split?
ascruggs92 It's confusing but makes sense. Using an example with one stock that is $100, index price is simply 100 / 1 = $100.

Now say the stock splits 2-1 so that the new price is $50. We want the index price to stay consistent regardless of split, so we reduce the share count to 0.5 shares. Thus, the index price is now 50 / 0.5 = $100.
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