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Mean-semivariance behavior: An alternative behavioral model

  • Estada, Javier

    ()

    (IESE Business School)

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    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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    File URL: http://www.iese.edu/research/pdfs/DI-0492-E.pdf
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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
    Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/

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    1. Estrada, Javier, 2002. "Systematic risk in emerging markets: the," Emerging Markets Review, Elsevier, vol. 3(4), pages 365-379, December.
    2. 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.
    3. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc.
    4. Markowitz, Harry M, 1991. " Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-77, June.
    5. Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
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