A Study on Characteristic Line: Determining the Relationship Between Return of the Stock and the Market

Ashwin Gedam

Abstract

Any stock market investor, either big or small, is interested to know the nature of a stock before investing. To analyze the individual stock fundamental analysis is used when one is required to search in depth about a company, however, it is time consuming but a more reliable method, but when an investor doesn’t have much time and he or she is willing to check the performance of an individual stock in a quick way then parameters from the domain of technical analysis, known as beta and alpha are used. Further, the market risk and return are important parameters to consider while investing into a market and to evaluate it beta and alpha are used. Among them beta is an important factor which is used to determine the systematic risk involved with security. It is employed to calculate a stock's anticipated return. An investment's return is adjusted for risk and expressed as alpha (αi). It is the profit over what is paid to assume the risk. A regression line that depicts the link between a security's return and the market's return is called a characteristic line. In this paper, beta and alpha are used to determine the return of a stock.