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
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