Security characteristic line (SCL) is a
regression line, 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
The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations.
Since the risk-free ra ...
and the X-axis is the excess return of the market in general. The slope of the SCL is the security's
beta
Beta (, ; uppercase , lowercase , or cursive ; grc, βῆτα, bē̂ta or ell, βήτα, víta) is the second letter of the Greek alphabet. In the system of Greek numerals, it has a value of 2. In Modern Greek, it represents the voiced labiod ...
, and the intercept is its
alpha
Alpha (uppercase , lowercase ; grc, ἄλφα, ''álpha'', or ell, άλφα, álfa) is the first letter of the Greek alphabet. In the system of Greek numerals, it has a value of one. Alpha is derived from the Phoenician letter aleph , whic ...
.
Security Characteristic Line
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Formula
:
where:
:''α''''i'' is called the asset's alpha
Alpha (uppercase , lowercase ; grc, ἄλφα, ''álpha'', or ell, άλφα, álfa) is the first letter of the Greek alphabet. In the system of Greek numerals, it has a value of one. Alpha is derived from the Phoenician letter aleph , whic ...
(abnormal return)
:''βi''(''R''''M'',''t'' – ''Rf'') 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
:''Rf'' is a risk-free rate
See also
* Security market line
Security market line (SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk. The risk of an individual risky security re ...
* Capital allocation line
Capital allocation line (CAL) is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays the return to be made by taking on a certain level of risk. Its slope is known as the "reward-to-variability ratio". ...
* Capital market line
Capital market line (CML) is the tangent line drawn from the point of the risk-free asset to the feasible region for risky assets. The tangency point M represents the market portfolio, so named since all rational investors (minimum variance criteri ...
* Modern portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificatio ...
References
External links
Security characteristic line calculatorCAPM and the Characteristic LineChapter 7 CAPM Chapter 13
{{DEFAULTSORT:Security Characteristic Line
Investment