Alternative Index Weighting Strategies on the Swedish Stock Market William Appelgren Johanna Trost
[email protected] [email protected] Stockholm School of Economics Department of Finance Spring 2014 Tutor: Michael Halling Abstract The Market-Capitalization index reweighting has since long had the role as the conventional tool for passive investments through its simplicity and CAPM framework conformance. Nowadays, alternative index reweightings are getting increased traction in the light of market-capitalization criticism and suggested risk-return improvements and possibilities of desired characteristics. This study sets to examine four alternative index reweightings; the Minimum Variance, the Equal Weights, the Equal Risk Contribution and the Risk-Weighted Alpha reweighting methods, as well as compare these indices to the benchmark Market-Capitalization weighted index over a number of quantitative measures. The stock universe chosen is the OMXS30 constituents of the NASDAQ OMX Stockholm Stock Exchange and the study also discusses the feasibility of introducing the alternative methods to the exchange. The study shows that all computed alternative methods beat the benchmark in terms of risk-adjusted return, as well as return in absolute measures. Index weight characteristics over time, especially as an effect of short-selling constraints, do however impact the weightings significantly and with regards to feasibility do not all alternative indices show on definite prevalence over the Market-Capitalization index for the examined data set and time period. Possible improvements of the data collection, method decisions and tools for analysis are also discussed as a reference for further studies. The findings of the study conclude in not being able to reject the proposal of an alternative index launch on the Swedish stock market.