Constructing a Price-Weighted Index requires the use of a \"divisor\" that may c

Question

Constructing a Price-Weighted Index requires the use of a "divisor" that may change during some market conditions, but not others. What are the three market conditions that would lead to the divisor to change from one period to the next for a Price-Weighted Index of equities?

             I.          Any Dividend

            II.         Any Dividend Payment Whose Value is Less Than 10% of the Firm's Share Price

            III.       Any Dividend Payment Whose Value is At Least 10% of the Firm's Share Price

            IV.       Any Stock Split

            V.        Any Stock Split with a Ratio of 1:1.25 Or Greater

            VI.       Anytime a Firm is Added to the Index

            VII.      Anytime a Firm is Dropped from the Index

            VIII.     Anytime Any Change is Made in the Index's Share Composition (i.e. Dropping or Adding a Firm)

a. I, II, III

b. III, VII, VIII

c. III, IV, VIII

d. II, IV, VI

Explanation / Answer

Three cases where Index Divisor changes are:
- When securities are added or removed from the index
- In case of share adjustment like Stock split
- When the Amount of Dividend is too high like 10% or more than 10% of the paid up capital.

• Now if we look Point VI and VII are covering in point VIII, thus, we can chose point VIII aloe instead of chosing VI and VII seperately.
• One option is clear i.e. Option III.
• Any stock split change the Index Divisor not just stock split with a ratio of 1:1.25 or greater. Thus, Option IV.

Thus, the three options are III, IV and VIII. Thus Option C.

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