Characteristic Line

AAA

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 risk-return 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.

RELATED TERMS
  1. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  2. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  3. Capital Market Line - CML

    A line used in the capital asset pricing model to illustrate ...
  4. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  6. Beta

    A measure of the volatility, or systematic risk, of a security ...
Related Articles
  1. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  2. 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.
  3. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  4. 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.
  5. Economics

    What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine the criticism of its accuracy.
  6. Economics

    Is the consumer price index (CPI) a cost of living index?

    Explore the consumer price index (CPI) and understand why it is not an actual cost of living index although it is often identified as one.
  7. Fundamental Analysis

    What is the affect of the invisible hand on consumers?

    Discover how consumers help initiate and benefit from the invisible hand of the market, which naturally coordinates trade in an exchange economy.
  8. Economics

    How does the invisible hand phenomenon affect investment markets?

    Read about how the invisible hand of the market coordinates investment markets and provides social benefit and why its effects are distorted along the way.
  9. Fundamental Analysis

    What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and internal factors.
  10. Fundamental Analysis

    How can quantitative easing be effective in the economy?

    Take a deeper look at the impacts of the Federal Reserve's large scale asset purchase plan, better known as quantitative easing, or QE.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center