CFA Practice Question

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CFA Practice Question

A steeper security characteristic line indicates a ______.

A. stronger relationship between the security and the market
B. higher level of systematic risk for the security
C. higher level of systematic risk for the market
D. higher variance for the security
Correct Answer: B

The slope is beta.

User Contributed Comments 8

User Comment
Iyal Explanation anyone?
Gina R(i)=alpha(i)+beta(i)*R(M)+Error

the characteristic line is a regression line (cloud) btw R(i) and R(M). Beta is the slope.
the higher beta, the more the line moves towards the R(i) [the y-axis] and away from R(M). [try to pluck in some numbers].
we know that higher beta means more risk.
0is4eva The characteristic line measures the systematic risk input of an individual asset. For each period, t, the rate of return is measured for a) the asset, and b) the market portfolio (or market proxy). The market portfolio's return is plotted on the x-axis, the asset's on the y-axis, a line is fitted to the scatter plot. Each dot corresponds to a specific measurement period, t. A steeper characteristic line means that a high(er) rate of return has been achieved for the asset than for the market portfolio, for most measurement periods (a lower return if on the negative side). A line of 45 dgr going through origo would probably mean that the asset and the market portfolio has the same rate of return for each time period t. A steeper line is thus equivalent to a higher level of systematic risk (in comparison to the market portfolio).
SanderLin Higher risk premium for the security, higher level of systematic risk for the security.
danlan2 Why not A?
kondagadu is the slope of the security characteristic line the market premium ? RM-RF according to the notes?
johntan1979 Commenters 1, 5 & 6 should refer to commenters 2, 3 & 4, as well as the notes.

If you still don't get these basic concepts at this point, you are not going to get it in the real exam.
gill15 Just know

Ri - Rf = alpha + Beta(Rm - Rf)

but unlike SML --- we are using beta as the slope and Rm - Rf is the X-axis
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