Answer: both rebalancing and reconstitution.

## Explanation A price-weighted index requires both rebalancing and reconstitution for proper management: **Rebalancing** is necessary because when stocks in the index undergo stock splits or other corporate actions that change their prices, the index divisor must be adjusted to maintain continuity. For example, if a stock splits 2-for-1, its price is halved, which would artificially lower the index value unless the divisor is adjusted. **Reconstitution** is required when the composition of the index changes - when stocks are added or removed from the index. This happens periodically based on the index methodology (e.g., the Dow Jones Industrial Average adds or removes companies). **Why not just one?** - **Option A (rebalancing only)** is incorrect because price-weighted indexes do experience changes in composition. - **Option B (reconstitution only)** is incorrect because price-weighted indexes require divisor adjustments for corporate actions. **Key Points:** - Price-weighted indexes (like the Dow Jones Industrial Average) are calculated by summing the prices of constituent stocks and dividing by a divisor. - The divisor must be adjusted for stock splits, dividends, and other corporate actions (rebalancing). - The constituent stocks themselves change over time (reconstitution). - Therefore, both processes are essential for proper index management.

Author: LeetQuiz .