AN ANALYTICAL FRAMEWORK FOR EXPLAINING RELATIVE PERFORMANCE OF CAPM BETA AND DOWNSIDE BETA

Don Galagedera

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 03, 341-358

Abstract: Even though investors' view of risk is generally regarded as related to the downside of the return distribution the CAPM beta is still a widely used measure of systematic risk. A number of studies compare the empirical performance of CAPM beta and downside beta in explaining the variation in portfolio returns and report mixed results. This paper provides a basis for explaining such mixed results. Using data generating processes in the mean-variance and mean-lower partial moment frameworks, analytical relationships between the CAPM beta and downside beta are derived. The derived relationships reveal that the association between the two systematic risk measures is to a great extent dependent on the volatility of the market portfolio returns and the deviation of the target rate from the risk-free rate. How the relationships derived here may be used in practice is demonstrated using empirical data.

Keywords: CAPM beta; downside beta; equilibrium pricing models; data generating processes; asset pricing (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024909005257

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