Possibility to Use Mean Absolute Deviation to Calculate Risk in CAPM
Abstract
This paper proposes an alternative approach to calculating the beta coefficient in the Capital Asset Pricing Model (CAPM) by using mean absolute deviation instead of variance and standard deviation. The objective is to improve the accuracy of risk estimation, especially in markets characterized by high volatility and asymmetric return distributions.
The study compares three beta coefficients: the traditional beta, the downside beta (D-beta), and a beta based on absolute deviation. Two regression methods are applied to evaluate the relationship between risk and expected return using empirical data from companies listed on the Bulgarian Stock Exchange.
The results indicate that the beta coefficient calculated using mean absolute deviation provides a stronger explanatory power for stock returns compared to the traditional beta. The findings suggest that this alternative approach is more suitable for emerging and less liquid markets, where classical CAPM assumptions may not hold.
References
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Markowitz, H. (1959). Portfolio Selection.
Mossin, J. (1966). Equilibrium in a Capital Asset Market.
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