Final answer:
The graphical representation of CAPM is the Security Market Line, which shows expected returns based on beta. The characteristic line is a different concept showing an asset's returns versus the market's. Foreign investment impacts are shown in a supply and demand diagram, where increased foreign capital shifts the supply curve rightward.
Step-by-step explanation:
The graphical representation of the Capital Asset Pricing Model (CAPM) is often misidentified, but the correct term for this representation is the Security Market Line (SML), not the characteristic line. While the characteristic line is a regression line that shows the relationship between an asset's returns and the market's returns, the SML is a graphical depiction of the CAPM that displays the expected return of an investment as a function of its non-diversifiable risk, or beta. In this graph, the vertical axis represents the expected return of the asset, while the horizontal axis represents the risk (beta). The SML includes the risk-free rate, where beta equals zero, and rises to the right showing the increased expected return for higher-risk investments.
When incorporating the impact of foreign investment, as described in the original question, a demand and supply diagram for financial capital would show the effect on interest rates. An increase in the supply of capital from foreign investors would be represented by a shift to the right of the supply curve (S). This would result in a new equilibrium with a lower interest rate (R) and a higher quantity of financial investment (Qo).