Question

The security characteristic line (SCL) associated with the single-index model is a plot of

Select one:

a. the security's returns on the vertical axis and the market index's returns on the horizontal axis.

b. the market index's returns on the vertical axis and the security's returns on the horizontal axis.

c. the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis.

d. the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis.

e. the security's returns on the vertical axis and Beta on the horizontal axis.

Clear my choice

Answer 1

Security characteristic line is a regression line that will be plotting the performance of particular security against market portfolio so, security characteristic line is plotted on a graph where x axis is excess return of the market and y-axis is excess return of a security over risk free return.

So, it can be said that the securities excess return on the vertical axis and the market index excess return on the horizontal axis is plotted by security characteristic line.

Rest of the options except Option (C) are not reflecting true scenarios.

Correct answer will be option (C)security excess return on the vertical axis and the market excess return on the horizontal axis