Question

Stock Price at t=0 Quantity Price at t=1 Quantity

Stock A $40 200 $44 200

Sock B $70 500 $35 1,000

Sock C $10 600 $15 600

What is the divisor at day t=1?

Answer 1

Assume price-weighted index value at t=0 is 1000

Sum of share prices of constituents at t=0 = 40 + 70 +10 = 120

Divisor = share prices of constituents / index value = 120 / 1000 = 0.12

Sum of share prices (pre 2:1 stock split of stock B) at t=1 = 44 + 70 + 15 = 129

Hence, index value = sum of pre split share prices / divisor = 129 / 0.12 = 1075

Sum of share prices (post 2:1 stock split of stock B) = 44 + 35 + 15 = 94

Hence, new divisor value (to account for stock split of stock B) = sum of post split share prices / index value = 94 / 1075 = .0874

Stock splits will not have any impact on divisor value for a market cap weighted index.