Some Analytical and Empirical Results on the Relationship between CAPM Beta and Downside Beta

Posted: 7 Oct 2006 Last revised: 26 Oct 2009

See all articles by Don U. A. Galagedera

Don U. A. Galagedera

Monash University - Department of Econometrics and Business Statistics

Date Written: October 6, 2006

Abstract

Using a data generating process in the mean-variance framework a relationship between CAPM beta and downside beta is derived. The derived relationship reveals that when the target rate exceeds (is lower than) the risk-free rate downside beta is higher (lower) than CAPM beta for low CAPM beta portfolios and the difference between the two betas is large in less volatile markets. The converse holds for high CAPM beta portfolios. Generally, for portfolios with abnormal returns, the standard error in the estimated downside beta could be considerably higher than the standard error in the estimated CAPM beta.

Keywords: CAPM beta, downside risk, data generating process, asset pricing, developed markets, emerging markets

JEL Classification: G12, G15

Suggested Citation

Galagedera, Don (Tissa) U. A., Some Analytical and Empirical Results on the Relationship between CAPM Beta and Downside Beta (October 6, 2006). International Journal of Theoretical and Applied Finance, Vol. 12, No. 3, pp. 341-358, May 2009, Available at SSRN: https://ssrn.com/abstract=935192

Don (Tissa) U. A. Galagedera (Contact Author)

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, VIC 3145
Australia
+61 3 9903 1578 (Phone)
+61 3 9903 2007 (Fax)

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