Price weight index

CFA Level I Equities
#1

A stock index consists of 2 stocks:

Company A has 50 shares @ $2

Company B has 10 shares @ $10

Price weighted index is 6

Company A’s stock increases to $4

Company B has a 2-for-1 and the stock goes to $5

What is the new value of the price weighted index?

I (after spending several minutes trying to remember) adjusted the base by dividing the after split total price (5+2=7) by the previous base (6) to get the new base (1.167). This makes sense to me as the post split index would now be the same as the pre-split index (7/1.167 = 6). I divided the new price weighted index (5+4) by the new base to get 7.7 (9/1.167)

The answer is apparently 7. Method is (10+4)/2 ‘A price weighted index is not affected by the split’. The CFAI seem to suggest adjusting the base rather than leaving the numerator the same. Any comments?

Thanks!

#2

As it says, you don’t adjust for the split. The price was $10, you leave it as $10, even though there was a split.

#3

in cfa mock they adjusted the denominator i feel

#4

I totally agree with you you mattmania…i feel that the answer given in the Schweser Mock is wrong…(Exam II Afternoon Session Question 88)

#5

scswer ethics q r so crap just like this answet

#6

mattmania @ Is the question you mentioned exactly the same or sth is missing ??

In schweser book 4 page 238 a similar example is given but it is also mentioned that split will be effective on next day .

If above mentioned question also states that split will take effect from next day then given answer and reasoning (7, (10+4)/2 ‘A price weighted index is not affected by the split’) is correct, otherwise im agree with your answer.