If there are stock splits, the divider in the price-weighted index formula has to be readjusted in order to keep the value of a price-weighted index identical. But how would the divider change if the total number of companies wouldnt? In other words, shouldnt it be impossible to keep the same price-weighted index value since the sum of the share prices of the individual companies (numerator value) would change but denominator (total of companies) wouldn’t?
In: 5
There’s a multiplier or divisor, like the DJIA Divisor.
If something splits, is removed, added, other corporate actions, they adjust the divisor.
“The Dow divisor is a numerical value used to calculate the level of the Dow Jones Industrial Average (DJIA). The DJIA is calculated by adding up all the stock prices of its 30 components and dividing the sum by the divisor. However, the divisor is continuously adjusted for corporate actions, such as dividend payments and stock splits.”
It kind of makes price weighted indexes stupid though. DJIA is such a tradition, but it’s kind of dumb as an actual index
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