Question

1. It turns out empirically that when a stock that was previously not included in the S&P500 Index is included, and one that was in the index is excluded, there are price impacts to both stocks.
   1. (20 points) If the announcement of the change in the composition of the index was made 2 weeks prior to the change, what would you expect to happen in the two weeks leading up to the change? Why?
   2. 1. (20 points) What would you expect to happen to the prices of the stocks on the day of the change? Why?

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

A. UPTO TO LISTING DATE:
When a company is included in s and p 500 index, then the demand for the company share increases by institutional investors like Mutual funds.

Hence it drives up its price up to listing date.

The opposite is true for the company being excluded from the Index. Its share price will decrease.

B. ON LISTING DATE:
On the day of listing there can be a selling pressure to cash out the gains from listing the Index and hence a decrease in the share price.

Vice-versa, The share which is excluded is available at a discount & there is buying pressure, hence driving its price up.