What is a characteristic line?
on the theory of financial markets, characteristic line graphically represents the relationship between the level of return on financial security or other asset, such as shares in the company, and the rate of return on all assets available on the market. The characteristic line, which is also known as the safety line, takes the form of a direct line with a Y -axis that represents a return of security exceeding the risk -free return and the X -axis representing it for a portfolio composed of all assets on the market. The values that form a characteristic line are obtained by performing statistical regression analysis. Return and correlated risk of securing your own capital or other asset due to all assets on the market together is represented on the slope and standard deviation of the characteristic line that defines beta assets.
The inclination of the characteristic line is beta (β) shares, the degree of correlated variability of security or the price of other assets compared to the market price as a whole. A vertical intercept line, the Y axes represents alpha (α) assets, which is a rate of return exceeding the risk -free rate that cannot be taken into account by risks specific to a particular market. In the modern Alpha portfolio theory, it represents a level of return over and over a risk -free return adapted to the relative risk of asset.
Displaying relative risks adapted to the return rate for stocks or other assets is characterized by a graphical representation of the capital assets (CAPM) price and is central to modern portfolio theory (MPT). According to CAPM and MPT, payback rates should increase together with the risk increase. The rate of return is said that depending on the risk measured by the variability of yields. Returns Tklobouk exceeds the risk -free interest rate plus additional compensation, assuming that a higher degree of risk is considered by CAPM and MPT as abnorm.
Consters and other assets commonly show unusual positive and negative yields in the real world markets. Shares or other assets with revenues above the characteristic line offer unusually high revenues compared to their risk and are considered undervalued. On the contrary, those who fall under the characteristic line offer abnormally low yields compared to their risk and are considered overstated.