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.