CFA Practice Question

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CFA Practice Question

The security characteristic line is ______.

A. used to derive the total risk of an asset
B. the SML
C. used to derive the systematic risk of an asset
D. the typical Markowitz efficient frontier
Correct Answer: C

According to the capital market theorem, only the systematic risk of an asset is relevant. The characteristic line is a regression method of deriving the systematic risk of an asset. It is the regression line of the best fit through a scatter plot of rates of return for the asset and for the market portfolio over some period of time.

User Contributed Comments 2

User Comment
danlan It's not the SML. Its slope is beta, while in SML, beta is the independant variable.
thekapila its a regression method. which is mathematically = y = mx +c
here for SML.we have rf + B(Rm - rf) representig the line which can beused to derive B
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