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) None of these are correct.

Question

Quizplus · Accepted Answer

A stock substitution or stock split will not change the overall value of the index, but it will affect the divisor. If a stock is substituted or split, it will affect the weight of that stock in the index, which will then affect the divisor. The divisor will need to be adjusted accordingly in order for the index to remain consistent. As a result, the index remains the same, but the divisor will either increase or decrease.

What Effect Does a Stock Substitution or Stock Split Have