Alternate Equity Indexation for Technology Stocks: An Application to the Nasdaq Index

Abstract

Technology stocks can be quite volatile as innovation creates new opportunities, however many technology companies may not provide a dividends that makes them harder to value. Fund managers try to outperform technology indexes, but the majority are unable to outperform them. So, investors have started looking at passive indexation methods like fundamental, equal weight, risk based and riskweighted alpha indexation. This paper develops a new equity indexation method called the Alternate Equity indexation (AEI) method that intends to provide a higher return than the underlying index by reducing underlying index volatility. The NASDAQ index is taken as an example of a technology index in this paper. Results show that the index developed using AEI method outperformed the NASDAQ index by 5 times during the period from 2nd January 2003 to 31st December 2012.