Security characteristic line
Encyclopedia
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
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.
where:
Market portfolio
Market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinitely divisible....
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
Risk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
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.
Formula
where:
- αi is called the asset's alpha (abnormal return)
- βi(RM,t – Rf) is a nondiversifiable or systematic risk
- εi,t is a diversifiable or idiosyncratic risk
See also
- Security market lineSecurity market lineSecurity market line is the graphical 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 .-See also:...
- Capital allocation lineCapital allocation lineCapital allocation line is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays to the investors on the return they can make by taking on a certain level of risk...
- Capital market line
- Modern portfolio theoryModern portfolio theoryModern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...