Positive abnormal return (α): Above-average returns that cannot be explained as compensation for added risk
Negative abnormal returns (α): Below-average returns that cannot be explained by below-market risk
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 risk
- εi,t is the non-systematic or diversifiable, non-market or idiosyncratic risk
- RM,t is the return to market portfolio
- Rf is a risk-free rate
See also
References
External links
- Security characteristic line calculator
- CAPM and the Characteristic Line
- Chapter 7 CAPM {link doesn't work}
- Chapter 13 {link doesn't work}
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