Mean-Semivariance Behavior: An Alternative Model of Behavior

IESE Working Paper No. D/492

19 Pages Posted: 19 Sep 2001

Date Written: February 2003

Abstract

The most widely-used measure of an asset's risk, beta, stems from an equilibrium in which investors display mean-variance behavior. This behavioral criterion assumes that portfolio risk is measured by the variance (or standard deviation) of returns, which is a questionable measure of risk. The semivariance of returns is a more plausible measure of risk (as Markowitz himself admits) and is backed by theoretical, empirical, and practical considerations. It can also be used to implement an alternative behavioral criterion, mean-semivariance behavior, that is almost perfectly correlated to both expected utility and the utility of mean compound return.

Keywords: downside risk, semideviation, asset pricing

Suggested Citation

Estrada, Javier, Mean-Semivariance Behavior: An Alternative Model of Behavior (February 2003). IESE Working Paper No. D/492, Available at SSRN: https://ssrn.com/abstract=283867 or http://dx.doi.org/10.2139/ssrn.283867

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
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