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.
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 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 ...

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. 
Economics
The Problem With Today’s Headline Economic Data
Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it. 
Economics
Explaining the Participation Rate
The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job. 
Fundamental Analysis
Is India the Next Emerging Markets Superstar?
With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP. 
Mutual Funds & ETFs
ETF Analysis: Guggenheim Enhanced Short Dur
Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixedincome securities. 
Mutual Funds & ETFs
ETF Analysis: iShares Morningstar SmallCap Value
Find out about the Shares Morningstar SmallCap Value ETF, and learn detailed information about this exchangetraded fund that focuses on smallcap equities. 
Mutual Funds & ETFs
ETF Analysis: iShares MSCI KLD 400 Social
Find out about the iShares MSCI KLD 400 Social exchangetraded fund, and learn detailed information about its characteristics, suitability and recommendations.

What assumptions are made when conducting a ttest?
The common assumptions made when doing a ttest include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
What are some of the more common types of regressions investors can use?
The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >> 
What types of assets lower portfolio variance?
Assets that have a negative correlation with each other reduce portfolio variance. Variance is one measure of the volatility ... Read Full Answer >> 
When is it better to use systematic over simple random sampling?
Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >> 
What are some common financial sampling methods?
There are two areas in finance where sampling is very important: hypothesis testing and auditing. The type of sampling methods ... Read Full Answer >>