DEFINITION of 'Characteristic Line'
A line formed using regression analysis that summarizes a particular security or portfolio's systematic risk and rate of return. The rate of return is dependent on the standard deviation of the asset's returns and the slope of the characteristic line, which is represented by the asset's beta.
INVESTOPEDIA EXPLAINS 'Characteristic Line'
A characteristic line of a stock is the same as the security market line, and is very useful when employing the capital asset pricing model, or when using modern portfolio formation techniques. The slope of the line, which is a measure of systematic risk, determines the riskreturn tradeoff. According to this metric, the more risk you take on  as measured by variability in returns  the higher the returns you can expect to earn.
There is considerable controversy regarding the use of beta as a measure of risk and return.

Systematic Risk
The risk inherent to the entire market or entire market segment. ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Capital Market Line  CML
A line used in the capital asset pricing model to illustrate ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Beta
A measure of the volatility, or systematic risk, of a security ...

How can I use a regression to see the correlation between prices and interest rates?
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >> 
How do I use the rule of 72 to estimate compounding periods?
The rule of 72 is best used to estimate compounding periods that are factors of two (2, 4, 12, 200 and so on). This is because ... Read Full Answer >> 
How can I use Bollinger Bands® to spot options trading opportunities?
Traders can use Bollinger Bands in a couple of different types of trading strategies. The most common strategy is using Bollinger ... Read Full Answer >> 
How can I run linear and multiple regressions in Excel?
The first step in running regression analysis in Excel is verifying that your software has the capabilities to perform the ... Read Full Answer >> 
How do I calculate a modified duration using Matlab?
The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >> 
How do I calculate the rule of 72 using Matlab?
In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>

Professionals
The Workings Of Equity Portfolio Management
Achieve analytical efficiency by applying your evaluation to a key set of stocks. 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Fundamental Analysis
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Active Trading
Modern Portfolio Theory: Why It's Still Hip
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. 
Fundamental Analysis
Understanding the Profitability Index
The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness. 
Economics
What is Neoliberalism?
Neoliberalism is a littleused term to describe an economy where the government has few, if any, controls on economic factors. 
Fundamental Analysis
Explaining the Monte Carlo Simulation
Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes. 
Economics
Understanding Limited Liability
Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company. 
Fundamental Analysis
Explaining the Empirical Rule
The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution. 
Economics
Explaining Demographics
Demographics is the study and categorization of people based on factors such as income level, education, gender, race, age, and employment.