Security characteristic line

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Security characteristic line (SCL) is a regression line,^[1] plotting performance of a particular security or portfolio against that of the market portfolio at every point in time. The SCL is plotted on a graph where the Y-axis is the excess return on a security over the risk-free return and the X-axis is the excess return of the market in general. The slope of the SCL is the security's beta, and the intercept is its alpha.^[2]

Formula

\mathrm {SCL} :R_{i,t}-R_{f}=\alpha _{i}+\beta _{i}\,(R_{M,t}-R_{f})+\epsilon _{i,t}

where:

α_i is called the asset's alpha (abnormal return)

β_i(R_M,t – R_f) is a nondiversifiable or systematic risk

ε_i,t is the non-systematic or diversifiable, non-market or idiosyncratic risk

R_M,t is the return to market portfolio

R_f is a risk-free rate

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