Reading the Characteristic Line and Beta

Each dot is one period's pair of index excess return and issue excess return. The horizontal axis is the index and the vertical axis is the issue, and an excess return is a return less the risk-free rate, for which the certificate of deposit rate is used. The straight line is the regression fitted to those dots. KOSPI issues take KOSPI 200 as their index and KOSDAQ issues take KOSDAQ 150.

Beta is the slope of the regression line. It says how far the issue moved together with the index on average as the index rose and fell, and a beta greater than one means the issue moved more than the index while a smaller one means it moved less. The intercept is the average excess return the index does not explain, and where the interval shown beside it contains zero it should be read as indistinguishable from zero.

The explained share is the part of the issue's return variation that the index accounts for. A low value means the issue moves largely on its own, not that the beta is wrong.

For the same issue, measuring returns day by day rather than week by week or month by month moves the dots, and the fitted line moves with them. At the daily frequency a beta corrected for differences in trading times is shown alongside, and the gap between the two shows how much later than the index that issue's trades are reflected.

Beta and the intercept are computed from the sample of the chosen window and frequency and are not values for the period ahead. The index is only a stand-in for the whole market, so beta does not say everything about market risk either. An issue listed too briefly to leave enough dots gets no characteristic line.