Characteristic Line

Beta measures systematic risk. Beta is the slope of the Characteristic Line. To compute beta, plot the monthly returns of the asset against the monthly returns on the market portfolio. The slope of the OLS regression line is beta.

The regression model is: k_it=α+β×k_mt+e_t

Where
k_it = return on asset i in month t
α = intercept
β = slope (Beta)
k_mt = return on the market in month t
e_t = error in month t

To see how beta is calculated from the data, move the purple markers (on the graph), which represent pairs of monthly asset and market returns. Observe how the intercept, slope and position of the characteristic line changes. The slope is the beta of the asset.