- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 4. Applications of the CAPM

###
**CFA Practice Question**

The security characteristic line is ______.

B. the SML

C. used to derive the systematic risk of an asset

D. the typical Markowitz efficient frontier

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 |