Highlight the main problems encountered in the construction and use of a stock market index.

CPA-Financial-Management-Section-3 Revision kit

Problems in preparing the index
– Treatment of bonus issue and stock split.
– Selection of shares to include in the index.
– Incorporation of newly quoted firms.
– Determine the base year
– Different methods of computing index e.g. value and price weighted, arithmetic and geometric mean etc.
– Frequency of stating the changes in the index.

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