Mean-semivariance Behavior (ii): the D-capm

For over 30 years academics and practitioners have been debating about 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, namely, mean-semivariance behavior. This framework, in turn, generates an alternative measure of risk for diversified investors, the downside beta, and an alternative pricing model, the D-CAPM, both of which are proposed in this article. The empirical evidence discussed below clearly supports the downside beta and the D-CAPM over beta and the CAPM. * I would like to thank ... for their valuable comments. Alfred Prada provided valuable research assistance. The views expressed below and any errors that may remain are entirely my own. ** IESE / Avda. Pearson 21 / 08034 Barcelona / Spain TEL: (34-93) 253-4200 / FAX: (34-93) 253-4343 / EMAIL: [email protected]