CFA Practice Question

There are 275 practice questions for this study session.

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.
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