Diversifying an Index

ArXiv ID: 2311.10713 “View on arXiv”

Authors: Unknown

Abstract

In July 2023, Nasdaq announced a `Special Rebalance’ of the Nasdaq-100 index to reduce the index weights of its large constituents. A rebalance as suggested currently by Nasdaq index methodology may have several undesirable effects. These effects can be avoided by a different, but simple rebalancing strategy. Such rebalancing is easily computable and guarantees (a) that the maximum overall index weight does not increase through the rebalancing and (b) that the order of index weights is preserved.

Keywords: Index rebalancing, Weight constraints, Portfolio optimization, Nasdaq-100, Equities

Complexity vs Empirical Score

• Math Complexity: 3.0/10
• Empirical Rigor: 2.0/10
• Quadrant: Philosophers
• Why: The paper proposes a simple power-based weighting transformation with elementary algebra, lacking advanced mathematical proofs or modeling. It is purely theoretical with no backtesting, empirical data, or implementation details for actual trading.

  flowchart TD
    A["Research Goal<br>Diversify Nasdaq-100<br>without increasing max weight"] --> B["Analyze Nasdaq's<br>Special Rebalance"]
    B --> C["Proposed Method<br>Convex Optimization<br>with Weight Constraints"]
    C --> D["Inputs:<br>Current Index Weights &<br>Market Caps"]
    D --> E["Compute New Weights<br>via Optimization Algorithm"]
    E --> F{"Key Findings"}
    F --> G["Max Weight Constraint<br>Guaranteed"]
    F --> H["Weight Order Preserved<br>Ascending/Descending"]
    F --> I["Computationally<br>Efficient Solution"]