Explain how a price-weighted stock index must be adjusted to reflect the stock split of a company.
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Explain how a price-weighted stock index must be adjusted to reflect the stock split of a company.
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Answer A priceweighted stock index is calculated by adding up the prices of all the individual stocks in the index and then dividing by a divisor The divisor is used to adjust the index for events such as stock splits dividends or other corporate actions to maintain continuity in the indexs value over time When a company undergoes a stock split the number of shares outstanding increases while the price per share decreases proportionally To adjust for this change in price due to the split the divisor of the index must be adjusted accordingly The adjustment ensures that the overall value of the index remains consistent before and after the split The adjustment process involves recalculating the divisor based on the ratio of the new shares issued to the old shares along with any changes in the stock prices The formula to calculate the adjusted divisor is AdjustedDivisor OldIndexValue NewIndexValue OldDivisor Heres how the adjustment process works 1 Calculate the ratio of the new shares to the old shares resulting from the stock split 2 Adjust the individual stock ...View the full answer
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Related Book For
Statistics For Business And Financial Economics
ISBN: 9781461458975
3rd Edition
Authors: Cheng Few Lee , John C Lee , Alice C Lee
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