What effect does a stock substitution or stock split have on a price-weighted series?
A) Index remains the same, divisor will increase/decrease.
B) Divisor remains the same, index will increase/decrease.
C) Index and divisor will both remain the same.
D) Index and divisor will both reflect the changes (immediately).
E) Not enough information is provided.

Question

Quizplus · Accepted Answer

A stock substitution or stock split would not change the overall value of the index, but it would affect the divisor. If a stock split occurs, the number of shares outstanding would increase, causing the price per share to decrease. This decrease in price would cause the weighting of the stock to decrease, so the dividend would increase. Therefore, the divisor would decrease. In contrast, a stock substitution would not change the number of shares outstanding, but it would change the price of the shares. This change in price would affect the weighting of the stock, so the divisor would increase or decrease accordingly.

What Effect Does a Stock Substitution or Stock Split Have