This paper introduces the risk weighted alpha indexation method that helps select stocks that have an increasing return and lower volatility over a long period of time.
Risk Weighted Alpha (RWA) index method intends to provide higher weight to stocks that have higher returns and lower variance.
Effectively, once the risk weighted alpha is obtained, this model assigns index weight to each stock based on this value.
Performance Characteristics --Risk Weighted Alpha and NASDAQ 100 Indexes
This paper analyzes if the risk weighted alpha index method will provide superior return and lower variance by re-weighting the stocks in the NASDAQ 100 index.
Performance--Risk Weighted Alpha Index 2003 2004 2005 2006 2007 2008 NASDAQ 100 Index 38.
In order to analyze the Risk Weighted Alpha method further, let's look at some examples to understand what this method is trying to achieve.
Though, we understand that variances and correlations for stocks change over time and the Risk Weighted Alpha portfolio will have to be re-weighted at subsequent intervals.
You can also review the risk weighted alpha index weights in the table provided below the graphs.