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Akshit patidar
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Asked: 2023-11-16T15:36:29+05:30 In:

Weighted method security indices

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As we know for valuing a index for first time we have to make base value = 100, right For example in terms of price weighted index Formula = Submission P ÷ divisor The divisor should be such that the value of the index should be comes out 100 Suppose submission P = 547 Divisor should be 5.47,                          because 547 / 100 = 5.47 & if we divide 547/5.47 it becomes 100 (base value). So 5.47 is the constant divisor for valuing the value of price weighted index, right? Because,                                                                    if the submission p is increased by 590 then the return is = 7.86% + 100(590/5.47) it means that the value of return calculated on the basis of 5.47 but not in the case if stock is splited, right?. As we know in equally weighted index the value of the index should be supposed 100, right and the further return is added to the 100, so can we also do this simple treatment with price weighted index? 

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    1 Answer

    1. Finance
      The Official Nerd
      1. Base Value of an Index:
        • It’s true that when an index is first created, a base value is set for ease of calculation and comparison. A common practice is to set the base value at 100.
      2. Divisor in Price Weighted Index:
        • In a price-weighted index, the divisor is not directly related to the base value. The divisor is used to maintain continuity in the index value over time, especially when there are stock splits or other corporate actions.
        • The divisor is adjusted to account for changes in the stock prices so that the index value remains consistent. It’s not typically set to make the initial index value equal to 100.
      3. Price Weighted Index Calculation:
        • The formula for a price-weighted index is the sum of the prices of the individual stocks divided by the divisor.

      • The divisor is adjusted to ensure that changes in stock prices do not affect the index value inappropriately.
      1. Equally Weighted Index:
        • In an equally weighted index, each stock has the same influence on the index, and the initial index value is often set to 100. Subsequent changes are then expressed as a percentage of this base value.
      2. Handling Stock Splits:
        • In the case of stock splits, adjustments need to be made to the divisor in a price-weighted index to account for the change in the stock’s price.
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