Capital Asset Pricing Models and Performance Measures in the Downside Risk Framework

Abstract

The purpose of this article is twofold. First, we present the capital asset pricing models and the performance measures in the downside risk framework as an alternative to traditional CAPM and to traditional performance measures, respectively. Second, we propose two new performance measures in the downside risk framework. The empirical investigation based on Morgan Stanley Capital Indices (MSCI) database of emerging markets shows that the capital asset pricing models in the downside risk framework, especially the D-CAPM, describe better the valuation of assets. The results obtained also support the Sortino ratio, the upside potential ratio and Omega measure over Sharpe ratio. Similarly, the results support our two performance measures over Treynor Index and the Jensen alpha.