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Security characteristic line (SCL) is a regression line, 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.
Formula
where:
αi is called the asset's alpha (abnormal return)βi(RM,t – Rf) is a nondiversifiable or systematic riskεi,t is the non-systematic or diversifiable, non-market or idiosyncratic riskRM,t is a market riskRf is a risk-free rateReferences
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