Security characteristic line explained

Security characteristic line (SCL) is a regression line,^[1] plotting performance of a particular security or portfolio against that of the market portfolio at every point in time. The SCL is plotted on a graph where the Y-axis is the excess return on a security over the risk-free return and the X-axis is the excess return of the market in general. The slope of the SCL is the security's beta, and the intercept is its alpha.^[2]

Formula

SCL : R _{i,t} - R _{f} = \alpha _{i} + \beta _{i} ( R _{M,t} - R _{f} ) + \epsilon _{i,t}

where:

α_i is called the asset's alpha (abnormal return)

β_i(R_M,t – R_f) is a nondiversifiable or systematic risk

ε_i,t is the non-systematic or diversifiable, non-market or idiosyncratic risk

R_M,t is the return to market portfolio

R_f is a risk-free rate

See also

• Security market line
• Capital allocation line
• Capital market line
• Modern portfolio theory

External links

• Security characteristic line calculator
• CAPM and the Characteristic Line
• Chapter 7 CAPM
• Chapter 13

Notes and References

1. http://www.investopedia.com/terms/c/characteristicline.asp Characteristic Line
2. http://financial-dictionary.thefreedictionary.com/Security+characteristic+line Security Characteristic Line