DEFINITION
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
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.
RELATED TERMS

Systematic Risk
The risk inherent to the entire market or entire market segment. Also known ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected return and ... 
Capital Market Line  CML
A line used in the capital asset pricing model to illustrate the rates of return ... 
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios to optimize or ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. The more spread ... 
Security Market Line  SML
A line that graphs the systematic, or market, risk versus return of the whole ... 
Linear Relationship
A statistical term used to describe the relationship between a variable and ... 
Compound Annual Growth Rate  CAGR
The yearoveryear growth rate of an investment over a specified period of time. ... 
MeanVariance Analysis
The process of weighing risk against expected return. Mean variance analysis ...
Related Articles

Professionals
The Workings Of Equity Portfolio Management

Bonds & Fixed Income
Find The Highest Returns With The Sharpe ...

Fundamental Analysis
The Capital Asset Pricing Model: An ...

Active Trading
Modern Portfolio Theory: Why It's Still ...

Active Trading
What Is Market Efficiency?

Fundamental Analysis
Getting On The Right Side Of The P/E ...

Personal Finance
What are the odds of getting a perfect ...

Investing Basics
Herding Tendencies Among Analysts

Fundamental Analysis
Understanding Leveraged Buyouts

Fundamental Analysis
How The SarbanesOxley Era Affected ...