Capital asset pricing models and performance measures

in the downside risk framework

Chokri Mamoghli a, Sami Daboussi b,*
a
Department of Finance, University of Tunis, Tunisia
b
Department of Finance, University of Jendouba, Tunisia

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
traditional performance measures respectively. Second, we develop 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.

JEL classification: G12

Keywords: Asymmetric returns; Downside risk; D-CAPM; MLPM model; Performance measures

1. Introduction

Based on mean-variance rule, Sharpe (1964), Lintner (1965) and Mossin (1966) developed
the capital asset pricing model CAPM. Similarly, Treynor (1965), Sharpe (1966) and Jensen
(1968) developed the traditional performance measures based on mean-variance criterion.
However, the traditional CAPM and these performance measures are subjected to some limits
in particular those concerning the asymmetry of returns and the risk perception of investors.
Indeed, this model and these traditional performance measures become inadequate when the
returns are not normally distributed. Moreover, the beta and the variance which are used as
risk measures in this model and these performance measures do not make distinction between
the returns superior and those inferior to the mean, they consider them equally undesirable.
Whereas, the investors often associate the risk to the obtaining of returns lower than the target
return. In order to overcome these gaps, some studies proposed the use of downside risk
measures in the CAPM and in the traditional performance measures to take into account the
asymmetry of returns and the risk perception of investors. The researches of Hogan and
Warren (1974), Bawa and Lindenberg (1977), Harlow and Rao (1989) and Estrada (2007)
contributed to the development of the capital asset pricing models in the downside risk
framework. Moreover, Sortino and Price (1994), Sortino, van der Meer and Plantinga (1999),
Keating and Shadwick (2002) and Mishra and Rahman (2002) developed the alternative
performance measures in this framework. In the same perspective, we propose to develop two
*
Corresponding author. Tel.: +216 20 573 668.
E-mail address: daboussi_sami@yahoo.fr (S. Daboussi).

Electronic copy available at: http://ssrn.com/abstract=1139307

2

new performance measures in the downside risk framework based on the downside beta
developed by Estrada (2007).
The rest of paper is structured as follows. In Section 2, we present the traditional CAPM
and its extensions in the downside risk framework. In Section 3, we present the traditional and
alternative performance measures. In Section 4, we empirically examine these capital asset
pricing models and these performance measures in the downside risk framework and we
compare them to those of the traditional framework. Section 5 contains the conclusion of the
study.

2. Capital asset pricing models in the downside risk framework

At First, we present the traditional CAPM in order to show the need for the downside risk
measures. Then, we present the evolution of a different capital asset pricing models in the
downside risk framework.

2.1. Capital asset pricing model

The fundamental idea of the traditional CAPM developed by Sharpe (1964), Lintner (1965)
and Mossin (1966) consists to relate the return of asset at its systematic risk measured by beta.
This relation is written:
E ( Ri ) = RF + β i [E ( RM ) − RF ] (1)
where E ( Ri ) is the required return on asset i, RF is the risk-free rate, E ( RM ) is the required
σ iM
return on the market and β i is the systematic risk of asset i which given by β i = where
σ M2
σ iM is the covariance between asset i and the market portfolio and σ M2 is the variance of the
market portfolio.
However, the use of the CAPM leads to an incorrect evaluation because of the asymmetrical
nature of returns and because the beta treats also the returns superior to the mean and those
inferior to it in the same manner. But, several researches stressed that the investors differently
treat the returns higher and lower than the mean. These researches suggested the incorporation
of the downside risk measures in the traditional CAPM to take into account the asymmetry of
returns and to describe better the preferences of investors. Indeed, the downside risk measures
consider only the returns lower than the target return in the calculation of the risk, but the
returns above this benchmark are not regarded as a risk.

2.2. The ES-CAPM model of Hogan and Warren (1974)

By introducing the notion of downside risk in the CAPM, Hogan and Warren (1974)
developed the measure of cosemivariance which represents the counterpart of covariance in
the traditional framework. By dividing the cosemivariance by the semivariance developed
initially by Markowitz (1959), they obtained the measure of downside beta. By replacing
traditional beta by the downside beta, Hogan and Warren (1974) developed the ES-CAPM
model which is written as follows:
E ( RM ) − RF
E ( Ri ) = RF + CSV RF ( RM , Ri ) (2)
SV ( RM )
where E ( Ri ) is the required return on asset i, RF is the risk-free rate, E ( RM ) is the required
return on the market, SV ( R M ) is the market’s semivariance of returns and CSV RF ( R M , Ri ) is
the cosemivariance between asset i and the market portfolio.

Electronic copy available at: http://ssrn.com/abstract=1139307

 3

The cosemivariance developed by Hogan and Warren (1974) is defined as follows:

CSV RF ( RM , Ri ) = E {(Ri − R F ) ⋅ Min[(RM − R F ), 0]}
Thus, the downside beta of Hogan and Warren (1974) is equal to:
CSVRF ( RM , Ri ) E{(Ri − RF ) ⋅ Min[(RM − RF ),0]}
β iHW = =
SV ( RM ) E{Min[(RM − RF ),0]²}
We note that Hogan and Warren (1974) considered in their analysis the risk-free rate as a
target rate of return.

2.3. The MLPM model of Bawa and Lindenberg (1977)

Based on the lower partial moments LPM determined by Bawa (1975) as a risk measure,
Bawa and Lindenberg (1977) developed the Mean-Lower Partial Moment (MLPM) model.
For n = 1, 2 , this model is written:
E ( R j ) = RF + β jMLPM n [E ( RM ) − RF ] (3)
CLPM n ( RF ; M , j )
where β jMLPM n = with CLPM n ( R F ; M , j ) denotes the co-LPM of order n
LPM n ( RF ; M )
between asset j and the market portfolio, which given by
RF ∞
CLPM n ( R F ; M , j ) = ∫ ∫ (R F − RM ) n −1 ( R F − R j )dF ( RM , R j )
RM = −∞ R j = −∞

and LPM n ( R F ; M ) is the LPMn of the market portfolio and is given as follows:
RF

LPM n ( R F ; M ) = ∫ (R F − RM ) n dF ( RM )
−∞
Bawa and Lindenberg (1977) also specified the risk-free rate as a target return. Moreover,
while fixing n = 2, Bawa and Lindenberg (1977) concluded that their model is reduced to the
ES-CAPM model of Hogan and Warren (1974).

2.4. The MLPM model of Harlow and Rao (1989)

By specifying the benchmark any arbitrary target rate of return, Harlow and Rao (1989)
developed a generalized MLPM model. For n = 1, 2 , this model is defined as follows:
E ( R j ) = RF + β jMLPM n [E ( RM ) − RF ] (4)
GCLPM n (τ ; M , j )
where β jMLPM n = with GCLPM n (τ ; M , j ) is the generalized co-LPMn
GLPM n (τ ; M )
between asset j and the market portfolio and is given as follows:
τ ∞
GCLPM n (τ ; M , j ) = ∫ ∫ (τ − R M ) n −1 (τ − R j )dF ( RM , R j )
RM = −∞ R j = −∞

and GLPM n (τ ; M ) is the generalized LPMn of the market portfolio, which given by
τ
GLPM n (τ ; M ) = ∫ (τ − R M ) n dF ( RM )
−∞
4

2.5. The D-CAPM of Estrada (2007)

Estrada (2007) developed a new capital asset pricing model in the downside risk framework
which made it possible to overcome the gaps of the former models in this framework. Indeed,
Estrada (2007) detected that the cosemivariance determined by Hogan and Warren (1974) has
a limitation. He stressed that the cosemivariance between asset i and the market portfolio M is
different from that between the market portfolio M and the asset i. This problem of inequality
is also posed with the co-LPM measure of Bawa and Lindenberg (1977) and Harlow and Rao
(1989). In order to remedy this gap, Estrada (2007) determined a new measure of the
cosemivariance which is defined as follows:
∑iM = E{Min[(Ri − µi ),0]⋅ Min[(RM − µM ),0]}
By dividing this new cosemivariance by the market’s portfolio semivariance of returns,
Estrada (2007) determined a new downside beta β iD that is written:
E {Min[(Ri − µi ),0] ⋅ Min[(RM − µM ),0]}
β iD =
E{Min[(RM − µM ),0]²}
While substituting the downside beta of Hogan and Warren (1974) by the new downside
beta, Estrada (2007) developed the D-CAPM which is defined as follows:
E ( Ri ) = RF + [E ( RM ) − RF ]β iD (5)

3. The performance measures in the downside risk framework

In order to show the advantages of the performance measures in the downside risk
framework, we propose first to present the traditional performance measures. Then, we
present these alternative performance measures.

3.1. The traditional performance measures

Despite the criticisms which theirs are addressed, the traditional performance measures
remain still most largely used. Indeed, these measures are Sharpe ratio, Treynor index and
Jensen alpha.
Regarding Sharpe ratio, it divides the excess return of portfolio by its standard deviation
(total risk). This ratio is noted S P and is defined by:
R − RF
SP = P (6)
σP
where R P is the return of portfolio, RF is the risk-free rate and σ P is the standard deviation
of the portfolio returns.
As for Treynor index, it measures the excess return divided by the systematic risk. This ratio
is noted TP and is written:
R − RF
TP = P (7)
βP
where R P is the return of portfolio, RF is the risk-free rate and β P is the beta of portfolio.
Finally, the Jensen alpha α P calculates the return of the portfolio in excess of its required
rate of return calculated according to CAPM. This performance measure is written as follows:
α P = RP − [RF + β P (E ( RM ) − RF )] (8)
In fact, these three performance measures assume that the portfolios returns are normally
distributed. Nevertheless, these measures become inadequate in the presence of asymmetric
 5

returns distributions. Moreover, they consider the standard deviation and the beta as a suitable
risk measures. However, these risk measures include the variations of returns to the rise and to
the fall, which is contradictory to the perception of investors towards the risk. In this regard,
several researchers proposed alternative performance measures in the downside risk
framework which make it possible to take into account the asymmetry of returns and the
preferences of the investors.

3.2. The Sortino ratio

Sortino and Price (1994) determined a new performance measure similar to Sharpe ratio,
this new measure is called Sortino ratio. Contrary to Sharpe ratio which uses the excess return
of the portfolio over the risk-free rate in the numerator, the Sortino ratio uses the excess return
of the portfolio over the minimum acceptable return. Moreover, these two ratios differ in the
denominator; the Sharpe ratio uses the standard deviation as a risk measure, but the Sortino
ratio replaces the standard deviation by the downside deviation which corresponds to the root
of the semivariance of returns. The Sortino ratio is noted SoR and is written:
R − MAR
SoR = P (9)
DD
where R P is the return of the portfolio, MAR is the minimum acceptable return and DD is
the downside deviation of the portfolio returns.

3.3. The upside potential ratio

The upside potential ratio is developed by Sortino, van der Meer and Plantinga (1999).
They proposed to evaluate the upside potential against the downside risk. Indeed, the upside
potential ratio divides the higher partial moment (HPM) of order 1, which computes the
returns superior to the minimum acceptable return, by the downside deviation. This ratio is
noted UPR and is written as follows:
HPM 1 ( MAR )
UPR = (10)
DD
Similarly to Sortino ratio, the upside potential ratio uses the downside deviation as a risk
measure instead of the standard deviation. However, the upside potential ratio differ from the
Sortino ratio in the numerator. The Sortino ratio takes the excess returns relative to the
minimum acceptable return, but the upside potential ratio takes the average of returns above
the minimum acceptable return in its numerator.

3.4. The Omega measure

Keating and Shadwick (2002) developed a performance measure called Omega. This
measure takes into account all moments of the returns distributions. It divides the returns
above the target rate of return by those below to it. Keating and Shadwick (2002) defined the
Omega measure noted Ω as follows:

∫ [1 − F ( x)]dx
b

Ω (r ) = r
r
(11)
∫ F ( x) dx
a

where r is the target rate of return, [a, b] is the interval of returns and F ( x) is the cumulative
distribution of returns.
6

3.5. The index of Mishra and Rahman

Being interested to the systematic risk in the downside risk framework, Mishra and Rahman
(2002) developed a new performance measure similar to Treynor ratio. According to the
index of Mishra and Rahman noted MRP , traditional beta is replaced by the downside beta
developed by Harlow and Rao (1989). This new ratio is written as follows:
R −R
MRP = P HR F (12)
βP
where R P is the return of portfolio, RF is the risk-free rate and β PHR is the downside beta of
Harlow and Rao (1989).

3.6. The alpha of Mishra and Rahman

Mishra and Rahman (2002) also developed a performance measure in the downside risk
framework similar to the Jensen alpha. Indeed, the alpha of Mishra and Rahman noted α PMR
considers the downside beta of Harlow and Rao (1989) as an appropriate measure of the
systematic risk instead of traditional beta. This performance measure is defined as follows:
[ ]
α PMR = R P − R F + β PHR ( E ( RM ) − R F ) (13)
The alpha of Mishra and Rahman determines the returns of the portfolio in excess of its
required rate of return calculated according to the MLPM model of Harlow and Rao (1989).

3.7. The index of Mamoghli and Daboussi

Based on the downside beta developed by Estrada (2007), we propose a new performance
measure similar to the Treynor index and to the Mishra and Rahman index. We call this new
performance measure the index of Mamoghli and Daboussi noted MDP and is written:
R − MAR
MDP = P D (14)
βP
where R P is the return of portfolio, MAR is the minimum acceptable return and β PD is the
downside beta of Estrada (2007).
In this ratio, we calculate the excess return of the portfolio over the minimum acceptable
return divided by the Estrada downside beta. Indeed, we use the downside beta of Estrada
(2007) in order to overcome the problem of inequality of the cosemivariances posed in Mishra
and Rahman ratio because it uses the Harlow and Rao downside beta.

3.8. The alpha of Mamoghli and Daboussi

By substituting the traditional beta in Jensen alpha or the Harlow and Rao downside beta in
Mishra and Rahman alpha by the Estrada downside beta, we develop a second performance
measure. We call this new measure the alpha of Mamoghli and Daboussi noted α PMD and is
written:
[ ]
α PMD = R P − R F + β PD ( E ( RM ) − R F ) (15)
Indeed, the alpha of Mamoghli and Daboussi calculates the return of the portfolio in excess
of its required rate of return calculated according to the D-CAPM of Estrada (2007).
 7

4. Empirical evidence

To perform the comparison between traditional CAPM and capital asset pricing models in
the downside risk framework on the one hand and between traditional performance measures
and those in the downside risk framework on the other hand, we use the Morgan Stanley
Capital Indices MSCI database of emerging markets over the period from January 1995 to
December 2004 in monthly frequency. Indeed, the MSCI database comprises the data of 27
emerging markets including 10 Asian, 7 Latin American and 10 African, European and
Middle-Eastern. Moreover, we consider the world index of the MSCI as the market portfolio.
For the risk-free rate we use the yield on 10-year U.S. Treasury Notes at the beginning of the
year 2005.
In the empirical evidence, we start with the test of the nature of the returns distributions of
emerging markets. Then, we study the impact of downside risk measures on the evaluation of
portfolios by comparing the traditional CAPM, to MLPM model and to D-CAPM. Finally, we
compare traditional performance measures to alternative performance measures.

4.1. The test of normality

The examination of table 1 shows that 20 emerging markets have a positive skewness and 7
emerging markets present a negative skewness. Moreover, the results of the kurtosis show
that all emerging markets have leptokurtic distributions, except India which has a platikurtic
distribution. Furthermore, the probability associated to Jarque-Bera test indicates that the
hypothesis of the normality of returns distributions is not accepted for 22 emerging markets.
But, the other 5 emerging markets (India, Taiwan, Colombia, Israel and Morocco) present
normal returns distributions. Consequently, the results of Jarque-Bera test of the normality
prove that the returns of 22 emerging markets are not normally distributed. In addition, the
results show that the world index is asymmetrical on the left and it has a leptokurtic
distribution. Moreover, the Jarque-Bera statistic shows that the hypothesis of the normality of
returns distribution for the world index is rejected.
Thus, the deviation of returns from the normality reinforces the purpose of our article which
consists in the study of the capital asset pricing models and the performance measures in the
downside risk framework. Indeed, the asymmetrical nature of emerging markets returns is not
compatible with the hypothesis of CAPM and traditional performance measures. Therefore,
the inclusion of downside risk measures in this model and these performance measures seems
necessary.
8

Table 1
Summary statistics (monthly returns)
Mean Return Standard deviation Skewness Kurtosis Jarque-Bera Probability
China -0.208360036 11.61038199 0.959647 6.012936 63.80738 0.000000
India 0.599284204 8.487046379 0.103945 2.430583 1.837272 0.399063
Indonesia 0.649193684 15.73491287 0.457430 4.664914 18.04454 0.000121
Korea 0.925524949 13.65051698 1.280157 8.037964 159.6815 0.000000
Malaysia 0.204541137 10.62773608 0.816223 7.713302 124.4005 0.000000
Pakistan 0.341274519 12.19394575 0.362600 4.237709 10.28919 0.005831
Philippines -0.708133716 10.12225451 0.699748 5.726580 46.96413 0.000000
Sri Lanka 0.160109196 10.77349798 1.139726 7.154623 112.2840 0.000000
Taiwan 0.143252941 9.323704544 0.424616 3.351443 4.223530 0.121024
Thailand -0.053791711 13.65782973 0.403041 4.213453 10.61118 0.004964
Argentina 0.674027258 11.49492025 0.417102 6.344557 59.40977 0.000000
Brazil 1.027160139 11.79892121 -0.406104 4.287247 11.58343 0.003053
Chile 0.278798614 6.944317074 -0.487185 4.978606 24.32139 0.000005
Colombia 0.869300057 9.768654803 0.197229 3.682057 3.103992 0.211825
Mexico 1.152374111 9.085883771 -0.731803 4.230659 18.28331 0.000107
Peru 0.878772631 8.218812567 -0.132971 6.918416 77.12354 0.000000
Venezuela 1.407044422 14.41435597 0.337413 6.465164 62.31374 0.000000
Czech Rep. 1.273749017 8.597571969 -0.075057 4.167808 6.931550 0.031249
Egypt 1.220534029 8.556184518 0.892747 4.318599 24.63345 0.000004
Hungary 2.141154759 10.50356276 0.108122 6.478115 60.72023 0.000000
Israel 0.967412859 7.802982598 -0.082329 3.577655 1.803989 0.405760
Jordan 0.66788505 4.474457475 0.581872 3.348761 7.379675 0.024976
Morocco 0.725825837 5.062516698 0.177183 3.857615 4.305398 0.116170
Poland 1.142459118 10.83204849 0.338272 4.692059 16.60388 0.000248
Russia 3.144129155 18.89988804 0.156131 4.158810 7.201733 0.027300
South Africa 0.609196686 7.891390922 -0.775120 4.752593 27.37413 0.000001
Turkey 2.422056248 17.81048965 0.612723 4.676178 21.55645 0.000021
World Index 0.62045327 4.17622684 -0.628791 3.519247 9.255648 0.009776

4.2. The results of capital asset pricing models in the downside risk framework

The methodology adopted in this part is that followed by Estrada (2007). Firstly, we study
the cross-section regressions analysis which relates the mean return to different measures of
systematic risk. Secondly, we perform a comparison between the required returns on equity
according to CAPM, the MLPM model and the D-CAPM.

4.2.1. The results of regressions

As regards the cross-section regressions analysis, the mean return of emerging markets
portfolios is regressed over different measures of systematic risk. The tested equations are
defined as follows:
MRi = γ 0 + γ 1 β i + u i (16)
MRi = γ 0 + γ 1 β MHR + u i (17)
MRi = γ 0 + γ 1 β RF
HR
+ ui (18)
MRi = γ 0 + γ 1 β 0HR + u i (19)
MRi = γ 0 + γ 1 β MD + u i (20)
 9

MRi = γ 0 + γ 1 β RF
D
+ ui (21)
MRi = γ 0 + γ 1 β 0D + u i (22)
where MRi is the mean return of emerging market i ; γ 0 and γ 1 are coefficients to be
estimated; β i , β MHR , β RF
HR
, β 0HR , β MD , β RF
D
and β 0D are variables of systematic risk (see Appendix
A) and u i is an error term.
For the Eq. (16), the mean return of the emerging market i is regressed on traditional beta.
Whereas, according to Eqs. (17), (18) and (19), the mean return is regressed on Harlow and
Rao downside beta for three target return namely the mean, the risk-free rate and the zero
value. But, for the Eqs. (20), (21) and (22), we regress the mean return on Estrada downside
beta for the same target returns.

Table 2
Cross-section analysis
γ0 t-stat γ1 t-stat R²
Panel A: OLS Estimation
β 0.196345 0.635070 0.635973 2.344708** 0.180265
β HR
M 0.046791 0.146193 0.745206 2.745492** 0.231661
β HR
RF 0.378587 1.060897 0.445683 1.425973 0.075218
β HR
O 0.379913 1.116766 0.442471 1.506735 0.083250
β MD -0.250218 -0.651497 0.837065 3.029744* 0.268564
β RF
D
0.054057 0.123529 0.609949 1.905484 0.126817
β OD 0.064082 0.150959 0.595542 1.946373*** 0.131594
Panel B: Heteroskedasticity-Consistent Estimation
β 0.196345 0.705903 0.635973 2.008556*** 0.180265
β HR
M 0.046791 0.151993 0.745206 2.370692** 0.231661
β HR
RF 0.378587 1.449225 0.445683 1.387201 0.075218
β HR
O 0.379913 1.522295 0.442471 1.455631 0.083250
β MD -0.250218 -0.615777 0.837065 2.553826** 0.268564
β RF
D
0.054057 0.133637 0.609949 1.693604 0.126817
β OD 0.064082 0.164232 0.595542 1.734757*** 0.131594
β , beta; β HR
M , Harlow and Rao downside beta (with respect to the mean); β RF , Harlow and Rao downside
HR

beta (with respect to the risk-free rate); β O , Harlow and Rao downside beta (with respect the to the zero); β M ,
HR D

Estrada downside beta (with respect to the mean); β RF , Estrada downside beta (with respect to the risk-free
D

rate); β O , Estrada downside beta (with respect to the zero). *** Significance at the 10% level, ** significance at
D

the 5% level and * significance at the 1% level.

Table 2 summarizes the results of these different regressions. First, it is important to note
that the problem which arises in the cross-section regressions is heteroskedasticity. So, we
present in panel A the results of OLS regressions, but panel B presents the results of
regressions in which significance is based on White’s heteroskedasticity-consistent covariance
matrix. The results in the two panels have the same conclusions. Indeed, these results indicate
10

that the β i , the β MHR , the β MD and the β 0D are significant, whereas the rest of the variables are
not.
The results of table 2 show that β MD is the most relevant variable in terms of explanatory
power. Indeed, the β MD explains about 27 per cent of the mean returns in emerging markets. It
is followed by the β MHR that explains 23.17 per cent of the variability in mean returns. But,
the β i only explains 18 per cent of the variability in the cross-section returns. Moreover, by
replacing the β i by the β 0D the results show that this last variable explains 13.16 per cent of
the mean returns in emerging markets. On the other hand, the coefficients of the β RF
HR
and
the β 0HR are clearly not significant. Likewise, the variable β RF
D
is not statistically significant.

4.2.2. Required returns on equity: the CAPM vs. the MLPM model vs. the D-CAPM

As for the required returns on equity, we perform a comparison firstly between the required
returns on equity according to traditional CAPM and those according to MLPM model of
Harlow and Rao (1989) and secondly between those of the CAPM and those of the D-CAPM
of Estrada (2007). For this, we use three target returns (the mean, the risk-free rate and the
zero value) for each one of MLPM model and D-CAPM.
By comparing the CAPM and the MLPM model for (τ = µ ) the results show that the
average β MHR (1.06) is slightly higher than the average β (1.01). We also notice that 18
emerging markets have a β MHR higher than B, whereas 9 markets have a β MHR lower than
the β . Besides, the results show that the required returns on equity of the CAPM which is
about 7.74 per cent is lower than that according to MLPM model for (τ = µ ) which is about
7.92 per cent. Thus, that produced an average difference of 18 basis points in favour of
MLPM model for (τ = µ ) .
By switching from the target return equal to the mean to a benchmark equal to the risk-free
rate, we remark that the average β is lower than the average β RF
HR
(1.03). The results also show
that 17 emerging markets have a β RF
HR
higher than the β , but the other markets have a β RF
HR

lower than the β . Likewise, we note that the average β RF HR

is lower than the average β MHR
which results an average required return according to MLPM model for (τ = RF ) lower than
that of MLPM model for (τ = µ ) , but it remains still higher than that given by the CAPM.
Thus, the average difference between the required returns on equity of the MLPM model
for (τ = RF ) which is equal to 7.82 per cent and those of the CAPM (7.74 per cent) decreased
to 8 basis points.
Similarly to the average β RFHR
and the average β MHR , the average β 0HR (1.03) is slightly higher
than the average β (1.01). Likewise, the results show that 17 emerging markets have a β 0HR
higher than the β , whereas 10 markets have a β 0HR lower than the β . The results also indicate
that the average required return of MLPM model for a benchmark equal to zero (7.83 per
cent) is higher than that of the CAPM (7.74 per cent). That implies that there is a weak
differential of average required return in favour of MLPM model for (τ = 0) .
 11

Table 3
Required returns on equity: CAPM vs. MLPM model
(τ = µ ) (τ = RF ) (τ = 0)
β CAPM
β MHR MLPM Difference β RF
HR
MLPM Difference β 0HR MLPM Difference

China 1.09510036 8.03815505 1.08609683 8.00659909 -0.03155596 1.21431788 8.45599376 0.4178387 1.20950416 8.43912244 0.40096738
India 0.58886714 6.26388701 0.71402757 6.70255469 0.43866768 0.71082229 6.69132066 0.42743365 0.6948611 6.63537921 0.37149221
Indonesia 1.43363059 9.22465043 1.2178152 8.46825133 -0.75639909 1.23046537 8.51258819 -0.71206223 1.25353725 8.5934515 -0.63119893
Korea 1.56377074 9.68077124 1.42332794 9.18854125 -0.49222999 1.38055409 9.03862561 -0.64214563 1.39105082 9.07541501 -0.60535623
Malaysia 0.91089712 7.39255157 0.89981008 7.35369325 -0.03885831 0.9692108 7.59693189 0.20438032 0.97258355 7.60875285 0.21620129
Pakistan 0.32476385 5.33824637 0.33464871 5.37289126 0.03464489 0.34475961 5.40832838 0.070082 0.3018351 5.25788468 -0.08036169
Philippines 1.04376728 7.85824065 1.00702648 7.72946992 -0.12877073 1.21622093 8.46266365 0.604423 1.21322043 8.45214738 0.59390674
Sri Lanka 0.42780442 5.69938741 0.63124307 6.41240797 0.71302056 0.69640666 6.64079616 0.94140875 0.68757119 6.6098292 0.91044179
Taiwan 1.06145348 7.92022802 1.14118744 8.19968305 0.27945503 1.22038194 8.47724736 0.55701934 1.21650741 8.46366772 0.54343971
Thailand 1.58599408 9.75866059 1.43885728 9.24296916 -0.51569143 1.55419274 9.64720187 -0.11145872 1.5689368 9.69887747 -0.05978312
Argentina 1.01808068 7.76821314 1.15403679 8.24471799 0.47650485 1.1488581 8.22656749 0.45835435 1.14618743 8.21720723 0.44899409
Brazil 1.77182264 10.4099605 1.99286415 11.1846764 0.77471585 1.99436644 11.1899417 0.77998114 2.08000767 11.4901008 1.08014023
Chile 0.96706267 7.58940303 0.99927405 7.70229886 0.11289584 1.0618393 7.92158024 0.33217721 1.0696778 7.94905296 0.35964993
Colombia 0.43850003 5.73687386 0.44966078 5.77599054 0.03911668 0.38917666 5.56400316 -0.1728707 0.36367747 5.47463249 -0.26224136
Mexico 1.37822549 9.03046426 1.48779238 9.41447903 0.38401477 1.42612842 9.19835649 0.16789223 1.45608616 9.30335368 0.27288942
Peru 0.59926586 6.30033288 0.80803229 7.0320265 0.73169362 0.77003313 6.89884539 0.59851251 0.77358099 6.91128006 0.61094718
Venezuela 0.98115834 7.63880613 1.08645511 8.00785481 0.36904868 0.97755493 7.62617675 -0.01262938 0.99611473 7.69122593 0.05241981
Czech Rep. 0.5688101 6.19359022 0.70616003 6.67498017 0.48138995 0.59797306 6.29580181 0.10221158 0.59136374 6.27263718 0.07904696
Egypt 0.46913457 5.84424312 0.56004558 6.16287193 0.31862881 0.44226264 5.7500612 -0.09418192 0.41005325 5.63717234 -0.20707078
Hungary 1.22748726 8.50215038 1.45329062 9.29355577 0.79140539 1.23784025 8.538436 0.03628563 1.26894527 8.64745421 0.14530383
Israel 1.05919124 7.91229921 1.12748147 8.15164577 0.23934656 1.08045584 7.98682829 0.07452908 1.08929714 8.01781569 0.10551647
Jordan 0.18846117 4.86052684 0.18515355 4.84893415 -0.01159269 0.13368466 4.66854376 -0.19198308 0.07981802 4.47974964 -0.3807772
Morocco 0.07995542 4.4802312 0.11426352 4.60047573 0.12024453 0.05575657 4.39541805 -0.08481315 0.00136538 4.20478544 -0.27544576
Poland 1.27626872 8.67312176 1.38560706 9.05633548 0.38321372 1.31632794 8.81352302 0.14040126 1.32898487 8.85788358 0.18476183
Russia 2.05171851 11.3909517 2.04535792 11.3686588 -0.02229287 1.70327023 10.1696951 -1.22125657 1.76941776 10.4015318 -0.98941988
South Africa 1.05601234 7.90115769 1.15919081 8.26278202 0.36162434 1.16955985 8.29912388 0.39796619 1.18261271 8.3448721 0.44371442
Turkey 2.11928025 11.627745 2.09667699 11.5485241 -0.0792209 1.8538659 10.6975093 -0.9302357 1.90115037 10.8632339 -0.76451104
Average 1.01061053 7.74203145 1.06316236 7.92621737 0.18418592 1.03319578 7.82118923 0.07915777 1.0377018 7.83698209 0.09495064
Note: Required returns on equity according to the CAPM and the MLPM model are annualized.
12

Table 4
Required returns on equity: CAPM vs. D-CAPM
(τ = µ ) (τ = RF ) (τ = 0)
β CAPM
β MD D-CAPM Difference β RF
D
D-CAPM Difference β 0D D-CAPM Difference

China 1.09510036 8.03815505 1.24517465 8.56414191 0.52598685 1.35619793 8.95326111 0.91510606 1.36249708 8.97533865 0.93718359
India 0.58886714 6.26388701 0.98037651 7.63606594 1.37217894 0.98160582 7.64037449 1.37648749 0.97679751 7.62352211 1.35963511
Indonesia 1.43363059 9.22465043 1.65050143 9.98474871 0.76009828 1.67084663 10.0560555 0.83140503 1.69863407 10.1534461 0.92879564
Korea 1.56377074 9.68077124 1.51130268 9.49687894 -0.1838923 1.47121429 9.35637539 -0.32439585 1.47559039 9.37171294 -0.3090583
Malaysia 0.91089712 7.39255157 1.19334363 8.3824823 0.98993073 1.25550513 8.60034862 1.20779705 1.27378318 8.66441033 1.27185877
Pakistan 0.32476385 5.33824637 0.90589111 7.3750063 2.03675993 0.9184673 7.41908387 2.0808375 0.89649243 7.34206541 2.00381904
Philippines 1.04376728 7.85824065 1.2140846 8.45517615 0.5969355 1.38687341 9.06077383 1.20253319 1.39433631 9.08693013 1.22868948
Sri Lanka 0.42780442 5.69938741 0.92584456 7.44494002 1.74555261 0.97645684 7.62232813 1.92294072 0.98185864 7.64126057 1.94187316
Taiwan 1.06145348 7.92022802 1.32834914 8.85565547 0.93542745 1.39991987 9.10649963 1.18627161 1.40628546 9.12881004 1.20858202
Thailand 1.58599408 9.75866059 1.66546796 10.037204 0.27854346 1.7702249 10.4043607 0.6457001 1.791644 10.4794313 0.72077072
Argentina 1.01808068 7.76821314 1.41337853 9.15367012 1.38545698 1.42193303 9.18365232 1.41543918 1.43941304 9.24491701 1.47670387
Brazil 1.77182264 10.4099605 2.14548924 11.7196034 1.30964287 2.14770888 11.7273829 1.31742237 2.22194525 11.9875697 1.57760918
Chile 0.96706267 7.58940303 1.0937257 8.0333371 0.44393408 1.15036644 8.231854 0.64245098 1.16667073 8.28899799 0.69959497
Colombia 0.43850003 5.73687386 0.79531057 6.98743883 1.25056497 0.77424002 6.91358988 1.17671602 0.77576177 6.91892337 1.18204951
Mexico 1.37822549 9.03046426 1.57250058 9.71136798 0.68090372 1.52110912 9.53124896 0.50078471 1.54910453 9.62936849 0.59890423
Peru 0.59926586 6.30033288 1.03890721 7.84120688 1.540874 1.01817779 7.76855352 1.46822064 1.03134915 7.81471706 1.51438418
Venezuela 0.98115834 7.63880613 1.31361839 8.80402649 1.16522036 1.23208538 8.51826607 0.87945995 1.24551174 8.56532335 0.92651722
Czech Rep. 0.5688101 6.19359022 1.06490031 7.9323086 1.73871838 1.0124045 7.74831903 1.55472881 1.03093389 7.81326163 1.61967141
Egypt 0.46913457 5.84424312 0.8252761 7.09246334 1.24822023 0.76349287 6.87592279 1.03167967 0.75687892 6.85274196 1.00849884
Hungary 1.22748726 8.50215038 1.61103733 9.84643325 1.34428288 1.44348028 9.25917206 0.75702168 1.47170493 9.35809502 0.85594465
Israel 1.05919124 7.91229921 1.22429407 8.49095876 0.57865955 1.19167552 8.37663585 0.46433664 1.20706793 8.43058382 0.5182846
Jordan 0.18846117 4.86052684 0.320447 5.32311648 0.46258964 0.28840079 5.21079954 0.3502727 0.25540529 5.09515551 0.23462867
Morocco 0.07995542 4.4802312 0.45419813 5.79189323 1.31166203 0.42918486 5.70422563 1.22399443 0.40952078 5.63530612 1.15507492
Poland 1.27626872 8.67312176 1.57561049 9.72226773 1.04914597 1.52874672 9.55801754 0.88489578 1.55142896 9.63751523 0.96439348
Russia 2.05171851 11.3909517 2.32466049 12.3475705 0.95661884 2.03677533 11.3385782 -0.0523735 2.08198303 11.4970241 0.10607241
South Africa 1.05601234 7.90115769 1.26708598 8.64093768 0.73978 1.2840366 8.70034696 0.79918927 1.3062818 8.77831287 0.87715519
Turkey 2.11928025 11.627745 2.4746808 12.8733682 1.2456232 2.31803606 12.3243529 0.69660795 2.37646728 12.5291452 0.90140023
Average 1.01061053 7.74203145 1.30131323 8.76089883 1.01886737 1.28700616 8.71075479 0.96872334 1.30130919 8.76088467 1.01885321
Note: Required returns on equity according to the CAPM and the D-CAPM are annualized.
 13

By changing from MLPM model to the D-CAPM, the results prove that the difference of
the required returns on equity between the CAPM and the D-CAPM is much higher. The
results of table 4 show that the average β MD (1.3) is 30 per cent larger than the average β
(1.01). In fact, all emerging markets have a β MD higher than the β except for Korea which has
a β MD lower than the β . The results also indicate that the average required return of the CAPM
(7.74 per cent) is lower than that given by the D-CAPM for (τ = µ ) which is about 8.76 per
cent. That produced an average difference of 1.02 per cent in favour of the D-CAPM.
Likewise, we establish that the differential of the required return is more notable for some
markets such as Pakistan which has a difference higher than 2 per cent.
By replacing the mean by the risk-free rate as a benchmark, the results prove that the
average β RF
D
(1.29) is higher than the average β (1.01). We also notice that all emerging
markets have a β RFD
higher than the β except for Korea and Russia which have a β RF D
lower
than the β . Likewise, the results show that the average required return of the CAPM (7.74 per
cent) is lower than that of the D-CAPM for (τ = RF ) which amount to 8.71 per cent. Thus, that
gives an average differential of required return about 97 basis points. Indeed, we note that this
difference is more considerable for some markets such as Pakistan (2.08 per cent) and Sri
Lanka (1.92 per cent).
By considering the target rate equal to zero, the results show that all emerging markets have
a β 0D higher than the β except for Korea which has a β 0D lower than the β . These results also
show that the average β 0D (1.3) is higher than the average β (1.01). That causes an average
required return according to D-CAPM for (τ = 0) higher than that of the CAPM (8.76 per cent
vs. 7.74 per cent). Consequently, these results lead to an average difference of 1.02 per cent in
favour of the D-CAPM for (τ = 0) . Indeed, this differential return exceeds the 1.5 per cent for
some emerging markets in particular for Pakistan and Sri Lanka which reaches 2 per cent and
1.94 per cent respectively.

In the end of this part, we can conclude that there is a notable difference between the
required returns on equity given by the D-CAPM based on Estrada downside beta and those
according to CAPM based on beta. These differential returns are significant and the investors
cannot neglect them. However, we also note that this difference is not considerable between
the required returns of the MLPM model based on Harlow and Rao downside beta and those
of the CAPM. Indeed, the difference observed of the required returns on equity between the
D-CAPM and the CAPM is attributable to the asymmetry of returns distributions and the risk
perception which are not captured by the CAPM. But, the divergence noted implicitly
between the MLPM model and the D-CAPM is due to the problem of inequality of the
cosemivariances existent in the definition of Harlow and Rao downside beta. So, we can
conclude that the D-CAPM seems to describe better the valuation of assets.

4.3. The results of traditional and alternatives performance measures

We perform the comparison of traditional and alternative performance measures in three

parts. Firstly, we compare the Sharpe ratio to the Sortino ratio, to the upside potential ratio
and to Omega measure. Secondly, we compare the Treynor index to the Mishra and Rahman
index and to the Mamoghli and Daboussi index. Lastly, we compare the Jensen alpha to the
Mishra and Rahman alpha and to the Mamoghli and Daboussi alpha.
14

Table 5
Sharpe ratio vs. Sortino ratio vs. upside potential ratio vs. Omega measure
Sortino ratio Sortino ratio Upside potential Upside potential Upside potential Omega measure Omega measure Omega measure
Sharpe ratio
(τ = RF) (τ = 0) ratio (τ = µ) ratio (τ = RF) ratio (τ = 0) (τ = µ) (τ = RF) (τ = 0)
Sp Rank SoR Rank SoR Rank UPR Rank UPR Rank UPR Rank Ω Rank Ω Rank Ω Rank
China -0.1659 26 -0.2505 26 -0.0952 26 2.4305 10 2.1597 23 2.3243 25 1 - 0.8749 26 0.9506 26
India 0.11 17 0.1622 17 0.3864 16 2.5118 7 2.6875 11 2.9414 11 1 - 1.0756 18 1.1868 17
Indonesia 0.0711 19 0.1074 19 0.2279 19 2.6334 3 2.7707 10 2.9323 12 1 - 1.0542 19 1.1187 19
Korea 0.1584 15 0.2695 15 0.4308 15 2.6106 4 2.9104 5 3.1056 8 1 - 1.1299 15 1.2152 16
Malaysia -0.0467 22 -0.0695 22 0.103 22 2.2037 21 2.1322 25 2.3139 26 1 - 0.9627 22 1.0575 22
Pakistan -0.0006 20 -0.001 20 0.1519 21 2.5021 8 2.5011 17 2.6712 18 1 - 0.9995 20 1.0784 21
Philippines -0.3529 27 -0.4956 27 -0.3369 27 2.3989 13 1.8749 27 2.0317 27 1 - 0.7556 27 0.8275 27
Sri Lanka -0.0606 23 -0.0955 23 0.0843 23 2.4001 12 2.2995 21 2.4916 21 1 - 0.9526 23 1.0434 23
Taiwan -0.0764 24 -0.1129 24 0.082 24 2.6012 5 2.4741 18 2.696 17 1 - 0.9482 24 1.0389 24
Thailand -0.1024 25 -0.1488 25 -0.0202 25 2.4616 9 2.2921 22 2.4381 22 1 - 0.9229 25 0.9892 25
Argentina 0.1054 18 0.1539 18 0.315 18 2.2379 17 2.4137 19 2.6075 20 1 - 1.0832 17 1.1764 18
Brazil 0.2164 13 0.3015 13 0.4535 14 2.2239 19 2.5625 16 2.7479 16 1 - 1.1668 13 1.2602 14
Chile -0.0334 21 -0.0453 21 0.1987 20 2.158 23 2.1147 26 2.353 24 1 - 0.9765 21 1.1081 20
Colombia 0.1993 14 0.3015 14 0.5033 13 2.3385 16 2.6593 12 2.8904 13 1 - 1.1528 14 1.2651 13
Mexico 0.3349 6 0.4632 6 0.6645 9 2.138 24 2.6383 13 2.8787 14 1 - 1.2538 6 1.378 9
Peru 0.2413 12 0.3488 12 0.5785 12 2.0582 26 2.3912 20 2.6277 19 1 - 1.1959 12 1.3414 10
Venezuela 0.2815 8 0.4437 8 0.5868 11 2.3703 15 2.817 8 2.9802 10 1 - 1.242 7 1.3341 11
Czech Rep. 0.4097 4 0.6167 5 0.8543 6 2.2043 20 2.8409 7 3.1157 7 1 - 1.3256 4 1.4699 3
Egypt 0.387 5 0.6854 4 0.9766 3 2.5453 6 3.2631 4 3.5999 3 1 - 1.311 5 1.4602 5
Hungary 0.6801 1 1.0891 1 1.3049 1 2.1917 22 3.3266 3 3.5948 4 1 - 1.5982 1 1.747 1
Israel 0.2977 7 0.4341 9 0.6824 8 2.1343 25 2.5723 15 2.8548 15 1 - 1.233 8 1.3809 8
Jordan 0.2655 11 0.4438 7 0.9706 4 2.3973 14 2.8041 9 3.3048 5 1 - 1.2002 11 1.4666 4
Morocco 0.2775 9 0.4264 11 0.8418 7 2.2265 18 2.614 14 3.0256 9 1 - 1.2104 10 1.4393 6
Poland 0.2773 10 0.4336 10 0.625 10 2.4168 11 2.8941 6 3.1243 6 1 - 1.2163 9 1.3235 12
Russia 0.623 2 1.0208 2 1.1428 2 2.8491 2 4.2286 1 4.4341 1 1 - 1.4834 2 1.5578 2
South Africa 0.1229 16 0.1632 16 0.3774 17 1.9782 27 2.1459 24 2.3786 23 1 - 1.0939 16 1.2263 15
Turkey 0.4711 3 0.7944 3 0.9255 5 2.9451 1 4.0088 2 4.2155 2 1 - 1.3624 3 1.435 7
World Index 0.2423 - 0.3311 - 0.7696 - 1.9248 - 2.2277 - 2.6598 - 1 - 1.1843 - 1.4541 -
Note: The values of performance measures are annualized.
 15

4.3.1. Sharpe ratio vs. Sortino ratio vs. upside potential ratio vs. Omega measure

Being interested to the total risk, we compare the Sharpe ratio to the Sortino ratio, the
upside potential ratio and Omega measure. The results of this comparison are presented in
table 5. First, the results show that 11 emerging markets have a Sharpe ratio higher than that
of the world market portfolio which has a ratio equal to 0.2423. But the other 16 markets have
a Sharpe ratio lower than that of the world market. For the markets which have a good
performance, we notice that all these markets belong to the Africa, Europe and Middle-East
region, except for Mexico and Venezuela.
The results also show that the Sortino ratio produces a different rank from that of the Sharpe
ratio. These results indicate that the performance of the world portfolio is 0.33 for the Sortino
ratio for (τ = RF ) and 0.77 for the Sortino ratio for (τ = 0) . We notice that some portfolios
experienced a considerable change in their rank such as Jordan which has advanced from the
11th place according to the Sharpe ratio to the 7th place according to the Sortino ratio for
(τ = RF ) and to the 4th place according to the Sortino ratio for (τ = 0) . Moreover, the results
of the Sortino ratio for (τ = RF ) indicate that Peru became more performing than the world
portfolio. Thus, we conclude that according to this ratio 12 emerging markets have a
performance better than that of the world portfolio. However, the results of the Sortino ratio
for (τ = 0) show that 7 emerging markets only have a ratio higher than that of the world
portfolio. But, Israel, Mexico, Poland and Venezuela became less performing than the world
portfolio after performing better than the world index according to the Sharpe ratio.
Moreover, the results prove that the difference in the portfolios ranking between the Sharpe
ratio and the upside potential ratio is more significant than that between the Sharpe ratio and
the Sortino ratio. Indeed, the results of the upside potential ratio for (τ = µ ) show that all
emerging markets have a ratio higher than that of the world portfolio (1.9248). The results
show that the portfolios rank by the upside potential ratio for (τ = µ ) is completely different
from that of the Sharpe ratio. We notice that all portfolios change ranks, except Russia, while
switching from the Sharpe ratio to the upside potential ratio for (τ = µ ) . The results indicate
that the ranking is reversed for some portfolios. For example, the ranks of Indonesia, Taiwan,
Thailand and Philippines are strongly appreciated while changing from the Sharpe ratio to the
upside potential ratio for (τ = µ ) . On the other hand, the ranks of Hungary, The Czech
Republic, Mexico and Israel are strongly depreciated while switching from the first ratio to
the second ratio. For a benchmark equal to the risk-free rate, the results indicate that 22
emerging markets have an upside potential ratio higher than that of the world portfolio and
only 5 markets have a ratio lower than that of the world portfolio which is about 2.2277. By
comparing the Sharpe ratio to the upside potential ratio for (τ = RF ) , we note that 11
emerging markets became more performing than the world portfolio according to the second
ratio after performing less than the world index according to the first ratio. Likewise, by
comparing Sharpe ratio to the upside potential ratio for (τ = RF ) , we notice that all emerging
markets change ranks, except Venezuela and Philippines which kept their ranks. Although 14
emerging markets get their ranks appreciated especially Korea and Indonesia, 11 markets get
their ranks depreciated in particular Mexico, Morocco, Israel, Peru and South Africa by
changing from the Sharpe ratio to the upside potential ratio for (τ = RF ) . Concerning the
upside potential ratio for (τ = 0) the results show that 18 emerging markets have a ratio
higher than that of the world index and 9 emerging markets have a performance lower than
that of the world portfolio which is equal to 2.6598. Thus, we note that 7 emerging markets
became more performing than the world index while switching from the Sharpe ratio to the
upside potential ratio for (τ = 0) . By comparing also these two ratios, we notice that all
16

portfolios change ranks, except for Morocco and Philippines. Indeed, we observe that 14
markets have advanced in the ranking such as Jordan, Korea and Indonesia, but 11 emerging
markets moved back in this ranking such as Hungary, Mexico, Israel, Brazil and South Africa
while changing from the Sharpe ratio to the upside potential ratio for (τ = 0) .
As for the comparison of the Sharpe ratio to the Omega measure, we notice that the Omega
measure for (τ = µ ) takes the value 1 for all portfolios. This feature is related to Omega
measure for a target return equal to the mean because the half of the returns distribution is
above the mean and the other half is below it. In addition, the results of the Omega measure
for (τ = RF ) show that 12 emerging markets have a value higher than that of the world market
portfolio which is about 1.1843. But, the 15 other markets have an Omega lower than that of
the world index. Moreover, we notice that the majority of the markets maintained their ranks
while changing from the Sharpe ratio to the Omega measure for (τ = RF ) . The most
significant difference consists in the appreciation of the performance of Peru by the Omega
measure for (τ = RF ) which became more performing than the world market portfolio.
However, as to Omega measure for (τ = 0) the results show that only 5 markets (Hungary,
Russia, The Czech Republic, Jordan and Egypt) are more performing than the world portfolio
which has a value of 1.4541. But, the remainder of emerging markets is less performing than
the world portfolio. So, we conclude that 6 markets (Morocco, Turkey, Israel, Mexico,
Venezuela and Colombia) became less performing than the world portfolio while switching
from the Sharpe ratio to Omega measure for (τ = 0) .

To sum up, we want to put forward and highlight some interesting remarks concerning these
three alternative performance measures studied namely the Sortino ratio, the upside potential
ratio and Omega measure. First, we showed that the ranking of emerging markets portfolios
changed while switching from the Sharpe ratio to each one of these alternative performance
measures. In fact, this change in the portfolios ranking is due to the asymmetry of returns and
the risk perception of the investors which are not captured by the variance used in the Sharpe
ratio. The second remark, it is also common to these three alternative performance measures.
We note that the performance of portfolios decreases as the target rate of return increases.

4.3.2. Treynor index vs. Mishra and Rahman index vs. Mamoghli and Daboussi index

As for the use of the systematic risk in the performance measures, we compare the Treynor
index to the Mishra and Rahman index and to the Mamoghli and Daboussi index. The results
of this comparison are presented in table 6. First, the results show that 17 emerging markets
have a Treynor ratio higher than that of the world portfolio (3.5048). Whereas, the other 10
markets have a Treynor index lower than that of the world portfolio. As for the index of
Mishra and Rahman, the results show that this ratio produced the same ranking for the three
target returns namely the mean, the risk-free rate and the zero value. Moreover, the results
indicate that the good portfolios according to the Treynor index keep also a good performance
according to the Mishra and Rahman index. Likewise, the markets less performing than the
world portfolio according to the Treynor index remain still less performing than the world
portfolio according to the index of Mishra and Rahman. However, the results also show that
14 emerging markets get their ranks changed while switching from the Treynor index to the
index of Mishra and Rahman.
 17

Table 6
Treynor index vs. Mishra and Rahman index vs. Mamoghli and Daboussi index
Mishra and Rahman Mishra and Rahman Mishra and Rahman Mamoghli and Daboussi Mamoghli and Daboussi
Treynor index
index (τ = µ) index (τ = RF) index (τ = 0) index (τ = RF) index (τ = 0)
TP Rank MRP Rank MRP Rank MRP Rank MDP Rank MDP Rank
China -6.0925 26 -6.143 26 -5.4943 26 -5.5162 26 -4.9195 26 -1.8142 26
India 5.4906 14 4.5282 15 4.5486 15 4.6531 15 3.2938 16 7.6098 15
Indonesia 2.7026 19 3.1816 18 3.1489 18 3.0909 18 2.3189 19 4.7536 19
Korea 4.7894 16 5.2619 14 5.425 14 5.384 14 5.0907 14 7.9219 14
Malaysia -1.8857 22 -1.909 22 -1.7723 22 -1.7661 22 -1.3681 22 1.9488 23
Pakistan -0.083 20 -0.0805 20 -0.0782 20 -0.0893 20 -0.0293 20 4.6549 20
Philippines -11.855 27 -12.288 27 -10.174 27 -10.2 27 -8.9225 27 -5.8625 27
Sri Lanka -5.2867 25 -3.5829 25 -3.2476 25 -3.2894 25 -2.3162 24 1.9741 22
Taiwan -2.3245 23 -2.1621 23 -2.0218 23 -2.0282 23 -1.7625 23 1.2321 24
Thailand -3.054 24 -3.3663 24 -3.1165 24 -3.0872 24 -2.7361 25 -0.3592 25
Argentina 4.1205 17 3.6351 17 3.6515 17 3.66 17 2.9502 17 5.8322 17
Brazil 4.993 15 4.4392 16 4.4358 16 4.2532 16 4.1191 15 5.8717 16
Chile -0.83 21 -0.8032 21 -0.7559 21 -0.7504 21 -0.6977 21 2.912 21
Colombia 15.382 7 15 7 17.332 7 18.547 7 8.7119 9 14.109 8
Mexico 7.6472 12 7.084 13 7.3903 13 7.2382 13 6.9288 10 9.5149 12
Peru 11.464 10 8.5024 10 8.9219 10 8.881 10 6.7475 13 10.734 10
Venezuela 14.324 8 12.936 9 14.377 9 14.109 9 11.407 7 14.656 7
Czech Rep. 21.453 4 17.28 5 20.407 5 20.635 5 12.053 6 15.91 6
Egypt 24.451 2 20.482 3 25.936 3 27.974 3 15.024 3 20.704 4
Hungary 20.16 5 17.028 6 19.992 6 19.502 6 17.144 2 19.669 5
Israel 7.5973 13 7.1371 12 7.4478 12 7.3873 12 6.7527 12 10.146 11
Jordan 21.838 3 22.228 2 30.786 2 51.563 2 14.271 4 32.559 1
Morocco 60.861 1 42.587 1 87.275 1 3564 1 11.338 8 22.138 2
Poland 8.1524 11 7.5091 11 7.9043 11 7.829 11 6.806 11 9.4137 13
Russia 19.88 6 19.942 4 23.947 4 23.052 4 20.026 1 21.609 3
South Africa 3.1821 18 2.8989 19 2.8732 19 2.8415 19 2.617 18 5.7877 18
Turkey 13.715 9 13.863 8 15.679 8 15.289 8 12.539 5 13.998 9
World Index 3.5048 - 3.5048 - 3.5048 - 3.5048 - 3.5048 - 7.7048 -
Note: The values of performance measures are annualized.
18

Regarding the results of the index of Mamoghli and Daboussi, we find that 12 portfolios
have a performance worse than the world portfolio according to the index of Mamoghli and
Daboussi for (τ = RF ) and 15 portfolios have a performance better than the world portfolio
which is 3.5048. Whereas, the results of the Mamoghli and Daboussi index for (τ = 0) show
that 13 portfolios have a performance lower than that of the world market and 14 emerging
markets have a performance better than the world portfolio which is 7.7048. Moreover, the
results indicate that the ranks of 17 emerging markets change while shifting from the Treynor
index to the Mamoghli and Daboussi index for (τ = RF ) , whereas while switching from the
Treynor index to the Mamoghli and Daboussi index for (τ = 0) 16 emerging markets change
ranks. In other respects, by comparing the results of our ratio to Treynor ratio and to Mishra
and Rahman ratio, the most significant remark consists in the depreciation of the performance
of India and Argentina for the Mamoghli and Daboussi index for (τ = RF ) and of India, Brazil
and Argentina for the Mamoghli and Daboussi index for (τ = 0) . Indeed, these markets
became less performing than the world portfolio according to the index of Mamoghli and
Daboussi after performing better than the world portfolio with the Treynor index and the
index of Mishra and Rahman.

In order to conclude, the difference observed in the portfolios ranking according to the
Treynor index and the Mamoghli and Daboussi index is attributable to the asymmetry of
returns and the risk perception of the investors which are not captured by traditional beta used
in the Treynor index. But, the divergence noticed between the index of Mamoghli and
Daboussi and the index of Mishra and Rahman is due to the problem of inequality of the
cosemivariances in the downside beta used by this last ratio. Consequently, we conclude that
our new ratio namely the index of Mamoghli and Daboussi provides a more correct evaluation
of the portfolios performance because it makes it possible to surmount the problems of the
Treynor index and the Mishra and Rahman index.

4.3.3. Jensen alpha vs. Mishra and Rahman alpha vs. Mamoghli and Daboussi alpha

Being interested once again to the systematic risk in the performance measures, we perform
a comparison between Jensen alpha, Mishra and Rahman alpha and Mamoghli and Daboussi
alpha. The results of this comparison are presented in table 7. The results show that on the 27
emerging markets portfolios, 17 portfolios have a positive Jensen alpha and 10 portfolios have
a negative Jensen alpha. By comparing the Mishra and Rahman alpha to the Jensen alpha, we
notice that the 17 portfolios having positive values of Jensen alpha maintained their positive
values with the Mishra and Rahman alpha for the three target return. The same remark is also
noted for the portfolios which have a bad performance. However, we notice that 9 portfolios
change ranks into shifting from the Jensen alpha to the Mishra and Rahman alpha
for (τ = µ ) and for (τ = RF ) . We also notice that 11 portfolios change ranks according to the
Mishra and Rahman alpha for (τ = 0) compared to that of Jensen alpha. Moreover, the results
show that there is no change in the portfolios ranking by replacing the mean by the risk-free
rate as a benchmark return in the Mishra and Rahman alpha. But, by using the zero as a target
return, the results indicate that only 2 portfolios change ranks compared to the Mishra and
Rahman alpha for (τ = µ ) and for (τ = RF ) .
 19

Table 7
Jensen alpha vs. Mishra and Rahman alpha vs. Mamoghli and Daboussi alpha
Mishra and Rahman Mishra and Rahman Mishra and Rahman Mamoghli and Daboussi Mamoghli and Daboussi Mamoghli and Daboussi
Jensen alpha
alpha (τ = µ) alpha (τ = RF) alpha (τ = 0) alpha (τ = µ) alpha (τ = RF) alpha (τ = 0)
αP Rank α PMR Rank α PMR Rank α PMR Rank α PMD Rank α PMD Rank α PMD Rank
China -10.51 26 -10.478 26 -10.928 26 -10.911 26 -11.036 26 -11.425 26 -11.447 26
India 1.1694 16 0.7307 16 0.7419 16 0.7979 16 -0.2028 16 -0.2071 16 -0.1903 16
Indonesia -1.1501 19 -0.3937 19 -0.438 19 -0.5189 19 -1.9102 19 -1.9815 19 -2.0789 19
Korea 2.0087 15 2.5009 14 2.6508 14 2.614 14 2.1926 14 2.3331 14 2.3178 14
Malaysia -4.9103 23 -4.8714 23 -5.1146 23 -5.1265 23 -5.9002 23 -6.1181 23 -6.1821 23
Pakistan -1.1652 20 -1.1998 20 -1.2353 20 -1.0848 20 -3.202 20 -3.246 20 -3.169 20
Philippines -16.033 27 -15.904 27 -16.637 27 -16.626 27 -16.63 27 -17.235 27 -17.261 27
Sri Lanka -3.7611 21 -4.4741 21 -4.7025 21 -4.6715 21 -5.5066 22 -5.684 22 -5.7029 22
Taiwan -6.1876 24 -6.467 24 -6.7446 24 -6.731 24 -7.123 24 -7.3739 24 -7.3962 24
Thailand -10.402 25 -9.8866 25 -10.291 25 -10.342 25 -10.681 25 -11.048 25 -11.123 25
Argentina 0.6268 17 0.1503 17 0.1684 17 0.1778 17 -0.7587 17 -0.7886 17 -0.8499 17
Brazil 2.6367 14 1.862 15 1.8567 15 1.5566 15 1.3271 15 1.3193 15 1.0591 15
Chile -4.192 22 -4.3049 22 -4.5242 22 -4.5517 22 -4.636 21 -4.8345 21 -4.8916 21
Colombia 5.2082 9 5.1691 9 5.3811 9 5.4705 8 3.9577 9 4.0315 9 4.0262 9
Mexico 5.709 8 5.325 8 5.5411 8 5.4361 9 5.0281 7 5.2083 7 5.1101 7
Peru 4.7698 10 4.0382 12 4.1713 12 4.1589 12 3.229 12 3.3016 12 3.2555 12
Venezuela 10.616 4 10.247 4 10.628 4 10.563 4 9.4504 4 9.7362 4 9.6891 4
Czech Rep. 10.209 5 9.7276 5 10.107 5 10.13 5 8.4703 6 8.6543 6 8.5893 6
Egypt 9.8265 6 9.5079 6 9.9207 6 10.034 6 8.5783 5 8.7948 5 8.818 5
Hungary 20.444 3 19.653 3 20.408 3 20.299 3 19.1 3 19.687 3 19.588 3
Israel 4.3347 12 4.0954 11 4.2602 11 4.2292 11 3.756 10 3.8704 10 3.8164 10
Jordan 3.4552 13 3.4667 13 3.6471 13 3.8359 13 2.9926 13 3.1049 13 3.2205 13
Morocco 4.5859 11 4.4657 10 4.6707 10 4.8614 10 3.2743 11 3.3619 11 3.4309 11
Poland 5.9315 7 5.5483 7 5.7911 7 5.7467 7 4.8823 8 5.0466 8 4.9671 8
Russia 33.598 1 33.62 1 34.819 1 34.587 1 32.641 1 33.65 1 33.492 1
South Africa -0.3408 18 -0.7024 18 -0.7388 18 -0.7845 18 -1.0806 18 -1.14 18 -1.218 18
Turkey 21.639 2 21.718 2 22.569 2 22.404 2 20.393 2 20.942 2 20.738 2
Note: The values of performance measures are annualized.
20

As for the results of the alpha of Mamoghli and Daboussi, we notice that this performance
measure presents the same ranking of the portfolios for the three target return. Moreover, the
results of the alpha of Mamoghli and Daboussi show that 15 portfolios have positive values
and 12 portfolios have negative values. By comparing this measure to the Jensen alpha, we
notice that 10 emerging markets experienced a change in their ranks. The most significant
difference lies in the depreciation of the performance of 2 emerging markets (India and
Argentina) which had negative values while switching from the Jensen alpha to the Mamoghli
and Daboussi alpha. This last remark is also noted while changing from the alpha of Mishra
and Rahman to the alpha of Mamoghli and Daboussi for identical benchmark. Likewise, we
note that 8 portfolios change ranks into shifting from the alpha of Mishra and Rahman to the
alpha of Mamoghli and Daboussi for a target return equal to the mean and the risk-free rate,
but for a target return equal to zero 9 markets change ranks.
Lastly, we note that the Jensen alpha overestimate the performance of portfolios compared
to the alpha of Mamoghli and Daboussi, except Korea for the three target return and Russia
for the risk-free rate as a benchmark. Indeed, this overestimate of the performance and the
change in the ranking are explained by the asymmetric returns of emerging markets and the
risk perception which are not captured by the beta used in the Jensen alpha. The results also
prove that the Mishra and Rahman alpha overestimate the performance of portfolios
compared to the alpha of Mamoghli and Daboussi. This overestimate is due to the problem of
inequality of the cosemivariances existent in the Harlow and Rao downside beta used in the
Mishra and Rahman alpha. Consequently, the results obtained show that the alpha of
Mamoghli and Daboussi constitutes the appropriate solution which permits to overcome all
these gaps and which makes it possible to measure more correctly the performance of
portfolios.

5. Conclusion

Throughout this article, we showed the insufficiency of traditional CAPM and traditional
performance measures in the presence of asymmetrical returns distributions. We also showed
their inadequacy with the perception of investors towards the risk. Indeed, the disadvantage of
the CAPM and traditional performance measures consists in the consideration of the variance
and the beta as a risk measures. However, these measures do not take into account the
asymmetrical aspect of returns and do not make distinction between the returns above the
mean and those below to it. In this respect, we stressed the importance of the incorporation of
downside risk measures in the CAPM and in the performance measures. For this, we
examined the nature of returns of emerging markets portfolios. The deviation of these
portfolios returns from the normality justify the purpose of our article which consists in the
study of capital asset pricing models and performance measures in the downside risk
framework.
As for the comparison of the traditional CAPM to the MLPM model and to the D-CAPM,
the results showed that there is a significant difference between the required returns on equity
given according to these models. Indeed, these differential returns are considerable and the
investors cannot neglect them because an acceptable investment according to the CAPM or
the MLPM model, it can be not profitable according to the D-CAPM. Although the difference
observed between the required returns on equity given by the D-CAPM and those given by
the CAPM is attributable to the asymmetry of returns and the preferences of investors not
captured by the CAPM, the difference noted between the D-CAPM and the MLPM model is
due to the problem of inequality of the cosemivariances raised in the MLPM model. It follows
from these results that the D-CAPM presents the appropriate answer to all these problems.
 21

As for the comparison of traditional performance measures to those in the downside risk
framework, we perform this comparison in three parts. First thing, we compared the Sharpe
ratio to the Sortino ratio, to the upside potential ratio and to Omega measure. We showed that
the emerging markets portfolios ranking changed while switching from Sharpe ratio to each
one of these alternative measures. This change in the ranking is due to the asymmetry of
returns and the risk perception of investors not captured by the Sharpe ratio. Secondly, we
showed that the Treynor index, the Mishra and Rahman index and the Mamoghli and
Daboussi index produce a different rank of emerging markets portfolios. The results obtained
prove that the Mamoghli and Daboussi index is an exact measure because it takes into account
the asymmetry of returns and the perception of the investors towards the risk not captured by
the Treynor index and it also permits to overcome the problem of inequality of the
cosemivariances measures in the Mishra and Rahman index. Finally, the comparison of the
Jensen alpha to the alpha of Mishra and Rahman and to the alpha of Mamoghli and Daboussi
showed that these three measures offer a different ranking of portfolios. This comparison also
showed that the Jensen alpha and the Mishra and Rahman alpha overestimate the performance
of portfolios. Indeed, the change in the rank and the overestimate of the performance of the
Jensen alpha compared to the alpha of Mamoghli and Daboussi are due to the asymmetrical
nature of returns and the perception of the investors vis-à-vis the risk not captured by the
Jensen alpha. However, the change in the rank and the overestimate of the performance of the
Mishra and Rahman alpha compared to the Mamoghli and Daboussi alpha are explained by
the inequality of cosemivariances measures used in the Mishra and Rahman alpha. Therefore,
the alpha of Mamoghli and Daboussi is the suitable measure which permits to surmount the
gaps of the Jensen alpha and the Mishra and Rahman alpha.

Appendix A.

∑ (R )( )
T

it − Ri RM t − RM
Beta: β = t =1
;
∑ (R )
T

Mt − RM ²
t =1

∑ {(R ) [( ) ]}
T

it − Ri . Min RM t − RM , 0
Harlow and Rao downside beta for (τ = µ ) : β HR
= t =1
;
∑ {Min [(R ), 0]²}
M T

Mt − RM
t =1

∑ {(R )
− Ri . Min [(RM t − RF ), 0] }
T

it
Harlow and Rao downside beta for (τ = RF ) : β HR
RF = t =1
T
;
∑ {Min [(R
t =1
Mt − RF ), 0]²}

∑ {(R )
− Ri . Min [(RM t − 0), 0] }
T

it
Harlow and Rao downside beta for (τ = 0) : β HR
0 = t =1
T
;
∑ {Min [(R
t =1
Mt − 0), 0]²}

∑ {Min [(R ) ] [( ) ]}
T

it − Ri , 0 . Min RM t − RM , 0
Estrada downside beta for (τ = µ ) : β D
= t =1
;
∑ {Min [(R ) ]}
M T

Mt − RM , 0 ²
t =1
22

∑ {Min [(R − RF ), 0]. Min [(RM t − RF ), 0]}

T

it
Estrada downside beta for (τ = RF ) : β D
RF = t =1
T
;
∑ {Min [(R
t =1
Mt − RF ), 0]²}

∑ {Min [(R − 0 ), 0]. Min [(RM t − 0 ), 0]}

T

it
Estrada downside beta for (τ = 0) : β D
0 = t =1
T
.
∑ {Min [(R
t =1
Mt − 0 ), 0]²}

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