Abstract
ABSTRACTThe application of principal components in the construction of stock market indices has not been enthusiastically received by the investment community. One of the main reasons for this is that a principal component approach often results in the allocation of negative weights to some of the securities. It is shown that by a simple restatement of the problem, this disadvantage can be easily overcome. In addition, extra constraints can be imposed on the weights assigned to the different securities if so desired.
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