European Business Schools Librarian's Group

IESE Research Papers,
IESE Business School

No D/492: Mean-semivariance behavior: An alternative behavioral model

Javier Estada ()
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Javier Estada: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

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

JEL-codes: G12

19 pages, February 25, 2003

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