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Mean-semivariance behavior: An alternative behavioral model

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  • 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.

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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    File URL: http://www.iese.edu/research/pdfs/DI-0492-E.pdf
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    References listed on IDEAS

    as
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    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.
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    More about this item

    Keywords

    downside risk; semideviation; asset pricing;
    All these keywords.

    JEL classification:

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

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