price-weighted index

[sachin_patel]

This is what I see in schweser text
The divisor of a price-weighted index is adjusted for stock splits and changes in the composition of the index (i.e., when stocks are added or deleted), so the total value of the index is unaffected by the change
If I have two stock index ($10 and $5)
The price weighted index would be (10+5)/2. = 7.5
now lets say the stock with $5 splits so the new price is $2.5
Would this mean that the divisor will now become 1.67?
I think this was covered in level 2 but I can’t recall for sure.

 

[S2000magician]

When the stock splits you have to solve:
(10 + 2.50) / d = 7.5
d = 12.5 / 7.5 = 1⅔.
You got it.

 

[sachin_patel]

do they readjust this at some point in future?

 

[myriam2222]

You keep it as such until you have another stock split: then you need to adjust it again according to the method Magician gave you