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Mean-Semivariance Behaviour: An Alternative Behavioural Model

IESE Business School, Av. Pearson 21, Barcelona, jestrada{at}iese.edu

The most widely used measure of an asset’s risk, beta, stems from an equilibrium in which investors display mean-variance behaviour. This behavioural 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 behavioural criterion, mean-semivariance behaviour, that is almost perfectly correlated to both expected utility and the utility of mean compound return. Although the analytical framework and results are general, they are particularly relevant for emerging markets.

Key Words: Mean-variance behaviour • semivariance • downside risk

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