Characteristic Line

Categories: Charts, Metrics

This one gets into the weeds a bit in terms of statistical analysis, but it's worth it, we promise...

Say you want to look at the impact a particular event has on another company’s stock. Plot the values on a scatter diagram (the graph with the dots and lines) with the share prices being tracked on the vertical axis and overall market values on the horizontal axis. The linear regression between the share value and market price is the characteristic line. The alpha (vertical intercept) is measuring the average share price change (in percentage) if the market doesn’t move. The beta (horizontal line) measures the shares dependency on the market movements.

If the characteristic line is super steep, the security is considered to be volatile. That means it moves around a lot. Remember, adventure in investing means risk, so this is a security to approach with caution. This graph can be applied to both returns and prices.

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