Which one of the following is the primary flaw of a price-weighted index?
A)Price-weighted indexes ignore stock splits which affect stock prices.
B)The effect a company has on the index is dependent solely on the price per share.
C)Only a small number of stocks can be included in a price-weighted index.
D)If the number of shares outstanding of an index stock changes, the index divisor must be recomputed.
E)The index can only be computed once the trading day is over.

Question

Quizplus · Accepted Answer

The primary flaw of a price-weighted index is that the effect a company has on the index is dependent solely on the price per share. This means that a company with a high stock price will have a larger influence on the index, even if it has a smaller market capitalization or trading volume compared to another company with a lower stock price. This can distort the true performance of the index and may not accurately reflect the overall market trends.

Which One of the Following Is the Primary Flaw of a Price-Weighted