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Mean-semivariance behavior: An alternative behavioral model

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Author Info
Estada, Javier () (IESE Business School)
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.

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Paper provided by IESE Business School in its series IESE Research Papers with number D/492.

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Length: 19 pages
Date of creation: 25 Feb 2003
Date of revision:
Handle: RePEc:ebg:iesewp:d-0492

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Related research
Keywords: downside risk; semideviation; asset pricing;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Markowitz, Harry M, 1991. " Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-77, June. [Downloadable!] (restricted)
  2. Estrada, Javier, 2002. "Systematic risk in emerging markets: the," Emerging Markets Review, Elsevier, vol. 3(4), pages 365-379, December. [Downloadable!] (restricted)
  3. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
  4. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September. [Downloadable!] (restricted)
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  5. Hakansson, Nils H, 1971. "Multi-Period Mean-Variance Analysis: Toward A General Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 26(4), pages 857-84, September. [Downloadable!] (restricted)
  6. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06. [Downloadable!] (restricted)
  7. Pulley, Lawrence B., 1981. "A General Mean-Variance Approximation to Expected Utility for Short Holding Periods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 361-373, September. [Downloadable!]
  8. Pulley, Lawrence B, 1985. " Mean-Variance versus Direct Utility Maximization: A Comment," Journal of Finance, American Finance Association, vol. 40(2), pages 601-02, June. [Downloadable!] (restricted)
  9. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-93, May. [Downloadable!] (restricted)
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  10. Reid, Donald W & Tew, Bernard V, 1986. " Mean-Variance versus Direct Utility Maximization: A Comment," Journal of Finance, American Finance Association, vol. 41(5), pages 1177-79, December. [Downloadable!] (restricted)
  11. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March. [Downloadable!] (restricted)
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