Matching Portfolios

Abstract

We propose a portfolio performance measure which compares the return of a target portfolio against the return of a matching portfolio sharing the same exposures but holding different stocks. Treated as a benchmark, a matching portfolio provides an estimate of alpha because it shares the same characteristics as the target portfolio. Matching portfolios have three advantages over characteristic portfolios (Daniel et al., 1997). First, they can be matched on any number of characteristics without any overlap with the target portfolio. Second, matching portfolios can mimic any weighting structure, e.g., long-short and 130/30. Third, matching portfolios provide a measure of uncertainty for alpha.

Keywords: portfolio, benchmark, performance evaluation, matching, propensity score, rubin causal model

JEL Classification: C10, G11