What is a 'Characteristic Line'
A characteristic line is 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.
BREAKING DOWN '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.