Security characteristic line

Security characteristic line

Positive abnormal return (α): Above-average returns that cannot be explained as compensation for added risk

Negative abnormal returns (α): Below-average returns that cannot be explained by below-market risk

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

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

where:

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

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 a market risk

R_f is a risk-free rate

See also

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

References

1. Characteristic Line
2. Security Characteristic Line

External links

• Security characteristic line calculator
• CAPM and the Characteristic Line
• Chapter 7 CAPM {link doesn't work}
• Chapter 13 {link doesn't work}