Investments, tenth edition

   The Security Characteristic Line for Hewlett-Packard 

 The index model regression Equation 8.8 restated for Hewlett-Packard (HP) is

R

HP

(t) 5 a

HP

 1 b

HP

R

S&P500

(t) 1 e

HP

(t)

The equation describes the (linear) dependence of HP’s excess return on changes in the 

state of the economy as represented by the excess returns of the S&P 500 index portfolio. 

The regression estimates describe a straight line with intercept  a  

HP

  and slope  b  

HP

 ,  which 

we call the    security  characteristic  line    (SCL) for HP. 

  Figure 8.2  shows a graph of the excess returns on HP and the S&P 500 portfolio over 

the 60-month period. The graph shows that HP returns generally follow those of the index, 

but with much larger swings. Indeed, the annualized standard deviation of the excess return 

on the S&P 500 portfolio over the period was 13.58%, while that of HP was 38.17%. The 

swings in HP’s excess returns suggest a greater-than-average sensitivity to the index, that 

is, a beta greater than 1.0.  

 The relationship between the returns of HP and the S&P 500 is made clearer by the