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Mean-semivariance behavior: An alternative behavioral model


  • Estada, Javier

    () (IESE Business School)


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.

Suggested Citation

  • Estada, Javier, 2003. "Mean-semivariance behavior: An alternative behavioral model," IESE Research Papers D/492, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-0492

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    References listed on IDEAS

    1. Estrada, Javier, 2002. "Systematic risk in emerging markets: the," Emerging Markets Review, Elsevier, vol. 3(4), pages 365-379, December.
    2. 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.
    3. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
    4. 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.
    5. 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 1177-1179, December.
    6. 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.
    7. Markowitz, Harry M, 1991. " Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-477, 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 308-317, June.
    9. 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 857-884, September.
    10. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, June.
    11. Pulley, Lawrence B, 1985. " Mean-Variance versus Direct Utility Maximization: A Comment," Journal of Finance, American Finance Association, vol. 40(2), pages 601-602, June.
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    More about this item


    downside risk; semideviation; asset pricing;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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