Empirical Tests of the Mean-Semivariance CAPM

The mean-semivariance CAPM better explains the cross-section of US stock returns than the traditional mean-variance CAPM does. If regular beta is replaced by downside beta, the cross-sectional risk-return relationship improves considerably. Especially during bad-states of the world, when the equity premium is high, we find a near-perfect relation between risk and return. The explanatory power of conditional downside risk remains after controlling for the known size, value and momentum effects