Security characteristic line

[[Image:SCL-plot.PNG|320px|thumb|Security characteristic line

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

 * $$\mathrm{SCL} : R_{i,t} - R_{f} = \alpha_i + \beta_i\, ( R_{M,t} - R_{f} ) + \epsilon_{i,t} $$

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