Chartered Financial Analyst Level 1
Get started today
Ultimate access to all questions.
Ultimate access to all questions.
Which of the following lines is plotted on a graph with the excess return of a security on the y-axis and the excess return of the market on the x-axis?
Explanation:
The correct answer is C. Security characteristic line (SCL).
Option A (Capital market line) is incorrect because the capital market line (CML) is a special case of the capital allocation line where the portfolio is the market portfolio. The CML plots expected portfolio return (E(Rp)) on the y-axis against standard deviation (total risk) on the x-axis.
Option B (Security market line) is incorrect because the security market line (SML) represents the capital asset pricing model (CAPM). The SML plots expected return on the y-axis against systematic risk (beta) on the x-axis.
Option C (Security characteristic line) is correct because the SCL plots the excess return of a security on the y-axis against the excess return of the market on the x-axis. It is derived by regressing the excess return of the security (Ri - Rf) on the excess return of the market (Rm - Rf). This aligns with the question's description.