A method for forming an index in which a universe of N instruments is
initially defined. In a second step, a covariance matrix is assigned to
the universe. In a third step, one of the instruments from the universe
is removed. In a fourth step, a residual variance of the remaining
universe is calculated. In a fifth step, the removed instrument is
reinstated into the universe. Next, steps three through five of the
method are repeated N-1 times. In a sixth step, the removed instrument
for which the residual variance is minimized is inserted into the index.
In a seventh step, the removed instrument for which the residual variance
is minimized is eliminated from the universe. In an eighth step, variance
of each instrument in the remaining instrument is recalculated by
replacing it with its residual variance Finally, the third through eighth
steps are repeated until the index is formed.