Divsor Adjustment

mispoken said: "I'm trying to better understand how the divsor of a price weighted index is adjusted. If you have 40 Stocks and on Day one the index is at 2432.54 and the next day one of the 40 stocks goes up $5, the index is now at 2439.87, how do you get the new divisor on the index? Thanks Patrick"

misterjover said: "Excellent question. Did you know that some indexes are ahead of 76% of mutual funds? Well, to brighten up the room, please understand that the divisor is a value used to ensure that the numerical value of an index does not change despite developments that alter its composition. The raw value of the index is divided by the divisor in order to calculate the normalized value. The divisor changes when the makeup of the index changes and neutralizes the change. Indexes are designed to minimize your exposure to individual stock price fluctuations, but since they are correlated to market movements, they still are susceptible to the overall market risk."