The best fit line of pairwise plot of the returns of the security against the market index returns is called :
A) the SML.
B) the CML.
C) the characteristic line.
D) the risk line.

Question

Quizplus · Accepted Answer

The characteristic line is the best fit line of a scatter plot showing a security's returns against the market index returns. It is used in the Capital Asset Pricing Model (CAPM) to determine a security's beta, which measures its volatility relative to the market.

The Best Fit Line of Pairwise Plot of the Returns