Mimicking Portfolios

Posted: 22 May 2019

See all articles by Richard Roll

Richard Roll

California Institute of Technology

Akshay Srivastava

California Institute of Technology

Date Written: January 10, 2018

Abstract

Mimicking portfolios have many applications in the practice of finance. Here, we present a new method for constructing them. We illustrate its application by creating portfolios that mimic individual NYSE stocks. On the construction date, a mimicking portfolio exactly matches its target stock’s exposures (betas) to a set of ETFs, which serve as proxies for global factors, and the portfolio has much lower idiosyncratic volatility than its target. Mimicking portfolios require only modest subsequent rebalancing in response to instabilities in target assets and assets used for portfolio construction. Although composed here exclusively of equities, mimicking portfolios show potential for mimicking non-equity assets as well.

Keywords: portfolio theory

JEL Classification: G11, G12

Suggested Citation

Roll, Richard W. and Srivastava, Akshay, Mimicking Portfolios (January 10, 2018). https://doi.org/10.3905/jpm.2018.44.5.021. Available at SSRN: https://ssrn.com/abstract=3099630 or http://dx.doi.org/10.2139/ssrn.3099630

Richard W. Roll (Contact Author)

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Akshay Srivastava

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,440
PlumX Metrics