Investments, tenth edition

 Example  2.2 

Price-Weighted Average 

 You might wonder why the DJIA is now (in early 2013) at a level of about 14,000 if it is 

supposed to be the average price of the 30 stocks in the index. The DJIA no longer equals 

the average price of the 30 stocks because the averaging procedure is adjusted whenever a 

stock splits or pays a stock dividend of more than 10%, or when one company in the group 

of 30 industrial firms is replaced by another. When these events occur, the divisor used to 

compute the “average price” is adjusted so as to leave the index unaffected by the event. 

 Suppose XYZ were to split two for one so that its share price fell to $50. We would not 

want the average to fall, as that would incorrectly indicate a fall in the general level of 

market prices. Following a split, the divisor must be reduced to a value that leaves the 

average unaffected.  Table 2.4  illustrates this point. The initial share price of XYZ, which 

 Example  2.3 

Splits and Price-Weighted Averages