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.