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security characteristic line

{{Short description|Risk-calculating regression line}}

Image:SCL-plot.PNG

Security characteristic line (SCL) is a regression line,[http://www.investopedia.com/terms/c/characteristicline.asp Characteristic 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.[http://financial-dictionary.thefreedictionary.com/Security+characteristic+line Security Characteristic Line]

Formula

:\mathrm{SCL} : R_{i,t} - R_{f} = \alpha_i + \beta_i\, ( R_{M,t} - R_{f} ) + \epsilon_{i,t}

where:

:αi is called the asset's alpha (abnormal return)

:βi(RM,t – Rf) is a nondiversifiable or systematic risk

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

:RM,t is the return to market portfolio

:Rf is a risk-free rate

See also

References

{{Reflist}}

External links

  • [http://www.fxsolver.com/browse/formulas/Security+characteristic+line Security characteristic line calculator]
  • [https://web.archive.org/web/20110720030429/http://faculty.philau.edu/malhotrad/CAPM.ppt CAPM and the Characteristic Line]
  • [https://web.archive.org/web/20110928112038/http://fisher.osu.edu/~kho_1/Ch07_capm.ppt Chapter 7 CAPM {link doesn't work}]
  • [http://www.msu.edu/~john1955/Hirsch-ch13b.ppt Chapter 13 {link doesn't work}]

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Category:Investment