IESE Research Papers,
IESE Business School

Abstract: For over 30 years academics and practitioners have been debating the merits of the CAPM. One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean-variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis (mean-semivariance behavior), an alternative measure of risk for diversified investors (the downside beta), and an alternative pricing model (the D-CAPM). The empirical evidence discussed in this article for the entire MSCI database of developed and emerging markets clearly supports the downside beta and the D-CAPM over beta and the CAPM.

Keywords: downside risk; semideviation; asset pricing

JEL-codes: G12

20 pages, February 25, 2003

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