Valuation, Downside Risk Measures and Asymmetric Information: A Portfolio Optimization Approach

Abstract

This paper proposed optimal equilibrium portfolio algorithm for valuing assets. When mean variance criterion is assumed, the proposed procedure and the conventional CAPM yield identical valuations. When a downside risk measures are employed and the distributions are asymmetric, the proposed algorithm and the three moments extensions of CAPM may yield close, but not necessarily identical, valuations. Our semi-variance results are identical to those of Bawa& Lindenberg, but in contrast to those of Estrada's downside risk extension of CAPM. The impact on valuation of "Mean Variance Preserving Shifts" and asymmetrical information regarding future cash flows are demonstrated by the proposed model.