Original Research

Downside CAPM: The case of South Africa

Kwasi Okyere-Boakye, Brandon O’Malley
Journal of Economic and Financial Sciences | Vol 9, No 2 | a60 | DOI: https://doi.org/10.4102/jef.v9i2.60 | © 2017 Kwasi Okyere-Boakye, Brandon O’Malley | This work is licensed under CC Attribution 4.0
Submitted: 18 December 2017 | Published: 11 August 2016

About the author(s)

Kwasi Okyere-Boakye, Department of Accountancy, University of the Witwatersrand, South Africa
Brandon O’Malley, Department of Accountancy, University of the Witwatersrand, South Africa

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Abstract

Beta and the capital asset pricing model have traditionally been the preferred measures of risk. However, there is growing literature against the use of the capital asset pricing model to determine the cost of equity in markets, such as emerging markets, where investors display mean-semivariance behaviour and, where share returns are non-normal and asymmetric. Downside risk measures such as semideviation, downside beta and the downside capital asset pricing model have been found to be plausible alternate measures of risk. This study investigates empirically the relationship between risk and return in a downside risk framework and a regular risk framework using returns on companies listed on the JSE Securities Exchange. The empirical evidence from this study indicates that while downside beta and semideviation significantly explain the variation in returns, they do not support them as being more appropriate measures of risk over beta and standard deviation.

Keywords

Beta; capital asset pricing model; cost of equity; downside beta; downside risk; semideviation

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