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 formulas

Variables

SCLSecurity characteristic line (dimensionless)
αi The asset's alpha (abnormal return) (dimensionless)
βiBeta (dimensionless)
RMtMarket risk (dimensionless)
RfRisk-free rate (dimensionless)
ϵitThe non-systematic or diversifiable, non-market or idiosyncratic risk (dimensionless)