Sector price indexes in financial markets: methodological issues

Stock indices related to specific economic sectors play a major role in portfolio diversification. We observe some flaws in the traditional sector classification and propose a latent class approach in order to correctly classify the stock companies into homogenous groups under risk-return profile. Furthermore we provide synthetic price indexes for each traditional and new sector by evaluating the effect of different weighting structures on the risk-return profile. We obtain new sector indices which are consistent with the standard portfolio theory and lead to an improvement of sector portfolio diversification. Our results allow to introduce a methodological dimension into both the sector definition and the sector synthesis.