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An Investigation of Beta and Downside Beta Based CAPM-Case Study of Karachi Stock Exchange


Mohammad Tahir


COMSATS Institute of Information Technology

Qaiser Abbas


CIIT

Shahid Mehmood Sargana


CIIT

Usman Ayub


COMSATS Institute of Information Technology

Syed Kashif Saeed


COMSATS Institute of Information Technology

February 1, 2013

American Journal of Scientific Research, 85,118-135 (2013)

Abstract:     
Sharpe’s (1964) Capital Asset Pricing Model (CAPM) assumes that the relationship between risk and return is positive, linear and significant. However, it is not free from controversies and one of them advocates replacing CAPM’s beta by downside beta based on investors’ preference of downside risk. Roy (1952) debates that investor care for downside risk and Hogan and Warren (1974) replace variance with semivariance in CAPM as the first official version of downside risk based CAPM. Bawa (1975), Fishburn (1977) and Bawa and Lindenberg (1977) develop and extend proxy for downside risk/beta as Lower Partial Moment. This study empirically tests beta and downside beta based CAPM (DCAPM). Conceptual and empirical problems related in testing alternative models are discussed with adoption of Fama-MacBeth (1973) procedure by making it robust. This study inspects intercept, risk-return relationship, nonlinearities and effect of residuals for both CAPM and DCAPM. Intercept results are almost similar and they follow introduction of zero-beta models as outlined by Black et al. (1972). Both models show rejection of nonlinearities and effect of residuals. However, DCAPM comes out to be strong contender compared to CAPM for risk-return relationship. These results are consistent with Estrada (2002), Ang et al.(2004) and Post and Vliet (2004).

Number of Pages in PDF File: 18

Keywords: CAPM, variance, downside risk, lower partial moments

JEL Classification: G10, G11, G12, G14

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Date posted: March 31, 2013  

Suggested Citation

Tahir, Mohammad and Abbas, Qaiser and Sargana, Shahid Mehmood and Ayub, Usman and Saeed, Syed Kashif, An Investigation of Beta and Downside Beta Based CAPM-Case Study of Karachi Stock Exchange (February 1, 2013). American Journal of Scientific Research, 85,118-135 (2013). Available at SSRN: http://ssrn.com/abstract=2241416 or http://dx.doi.org/10.2139/ssrn.2241416

Contact Information

Mohammad Tahir
COMSATS Institute of Information Technology ( email )
Park Road
Chak Shahzad
Qaiser Abbas
CIIT ( email )
Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan
Shahid Mehmood Sargana
CIIT ( email )
Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan
Usman Ayub (Contact Author)
COMSATS Institute of Information Technology ( email )
Park Roak,
Islamabad, 44000
Pakistan
Syed Kashif Saeed
COMSATS Institute of Information Technology ( email )
Park Road
Islamabad, Federal Area 44000
Pakistan
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References:  129
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