Security characteristic line
Description
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. Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne. The beta (β) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.
Related formulasVariables
SCL | Security characteristic line (dimensionless) |
αi | The asset's alpha (abnormal return) (dimensionless) |
βi | Beta (dimensionless) |
RMt | Market risk (dimensionless) |
Rf | Risk-free rate (dimensionless) |
ϵit | The non-systematic or diversifiable, non-market or idiosyncratic risk (dimensionless) |