## What is a 'Characteristic Line'

A characteristic line is a line formed using regression analysis that summarizes a particular security's systematic risk and rate of return. The characteristic line is created by plotting a security's return at various points in time. The y-axis on the chart measures the excess return of the security. Excess return is measured against the risk-free rate of return. The x-axis on the chart measures the market's return in excess of the risk free rate.

The security's plots reveal how the security performed relative to the market in general. The regression line formed from the plots will show the security's excess return over the measured period of time as well as the amount of systematic risk the security demonstrates. The y-intercept is the security's alpha. The slope of the characteristic line is the security's systematic risk, or beta.

The characteristic line is also known as the security characteristic line (SCL).

Next Up

## BREAKING DOWN 'Characteristic Line'

The characteristic line is part of a wider suite of security and market performance assessment tools known as Modern Portfolio Theory (MPT). In addition to the characteristic line regression, other qualities of a security or the overall market can be plotted and regressed to help an investor measure risk and make decisions. Other analytic tools in the Modern Portfolio Theory family are the security market line (SML), the capital market line (CML), the capital allocation line (CAL) and the capital asset pricing model (CAPM). All of these systems use various constructions of risk, excess return, overall market performance, security beta, and individual security performance to assess the risk/return tradeoff and inform investment decisions.

RELATED TERMS
1. ### Regression

A statistical measure that attempts to determine the strength ...
2. ### Stepwise Regression

Stepwise regression is the step-by-step iterative construction ...
3. ### Capital Market Line - CML

A line used in the capital asset pricing model to illustrate ...
4. ### Hedonic Regression

Hedonic regression is a method used in economics to determine ...
5. ### Regressive Tax

A regressive tax is a tax that is applied uniformly, resulting ...
6. ### Risk Management

Risk management occurs anytime an investor or fund manager analyzes ...
Related Articles
1. Investing

### Regression Basics For Business Analysis

This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
2. Investing

### Rising Prices: Inflation or Quality Improvements?

Price indices are used to measure inflation, but qualitative improvements in products complicates attempts to isolate the true cause of rising prices.

Measuring the success of your investment solely on the portfolio return may leave you blindsided to risk. Learn how to evaluate your investment return.
4. Managing Wealth

### Modern Portfolio Theory: Why It's Still Hip

Investors still follow an old set of principles, known as modern portfolio theory (MPT), that reduce risk and increase returns through diversification.

### A Deeper Look At Alpha

The Jensen index helps investors compare realized returns to what should've been achieved.
6. Investing

### Arbitrage Pricing Theory: It's Not Just Fancy Math

What are the main ideas behind arbitrage pricing theory? Find out how this model estimates the expected returns of a well-diversified portfolio.
7. Investing

### Explaining the Capital Market Line

The capital market line (CML) depicts the level of additional return above the risk-free rate for each change in the level of risk.
8. Investing

### Alpha and beta for beginners

Alpha and beta are both risk ratios that investors use as a tool to calculate, compare and predict returns. Here is an in-depth look at what alpha and beta are and what they measure.
RELATED FAQS
1. ### In what types of economies are regressive taxes common?

Understand the three main taxation systems, regressive, proportionate and progressive, and learn where regressive tax systems ... Read Answer >>
2. ### How does Beta reflect systematic risk?

Learn what systematic risk is, what beta is and how it is related to market indexes, and how beta reflects the systematic ... Read Answer >>
3. ### How can I calculate the expected return of my portfolio?

Understand the components of the equation used to calculate the expected return of an investor's portfolio. Learn why the ... Read Answer >>
Hot Definitions
1. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
2. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
3. ### Financial Risk

Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
4. ### Enterprise Value (EV)

Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
5. ### Relative Strength Index - RSI

Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
6. ### Dividend

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.