Mean-Semivariance Behavior: A Note
Posted: 6 Jun 2003
Abstract
The most widely-used measure of an asset's risk, beta, stems from an equilibrium in which investors display mean-variance behavior. This criterion assumes that portfolio risk is measured by the variance (or standard deviation) of returns. However, the semivariance 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 expected utility and to the utility of mean compound return.
Keywords: Expected utility, Downside risk, Semideviation, Mean-Variance Behavior
JEL Classification: G14, G15
Suggested Citation: Suggested Citation