Security Characteristic Line (SCL)

A financial adviser explains to a client that beta measures volatility of a company's stock returns. Which of the following _best represents_ a graphic with a slope equal to beta?

Correct. Beta represents the slope of the best fit line, or characteristic line. It is the average relationship between the company's stock returns and those of the market. The steeper the slope, the more volatile the stock's returns are as compared to the market's returns.

Incorrect. The slope of the SML is called the market risk premium, which is not the company's beta measure.

Incorrect. A graph of the company's stock returns versus short-term T-bills may be represented as a straight line, but the slope of this line is not the company's beta measure.

Security market line (SML)

Characteristic line for the company's stock returns versus the market's portfolio returns in the same period

Plot of the company's stock returns against the returns on short-term US Treasury bills over the same period