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Are you sure that you want to delete this answer? Yes Sorry, something has gone wrong. The line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.
The X-axis represents the risk betaand the Y-axis represents the expected return. The market risk premium is determined from the slope of the SML. It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk.
Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk standard deviation for a particular portfolio.
The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return.
The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model CAPM demonstrates that the market portfolio is essentially the efficient frontier Source s:What is the difference between the “Capital Market Line” and the “Security Market Line”?
6. Define the “separation principle”.
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Fig 1: Capital Market line Security Market Line The security market line (SML) is the graphical representation of the Capital asset pricing model. non-diversifiable risk (its beta). All points on the CML have better risk-return profiles when compared to any portfolio located on efficient frontier.
Plotting the SML Notice the difference between the CML and the SML: SML plots the expected return for all assets in relationship to beta CML plots the expected returns for the optimal combinations of the market and risk-free in relationship to portfolio SD.
One of the differences between CML and SML. is how the hazard factors are measured. While standard divergence is the step of hazard for CML.
Beta coefficient determines the hazard factors of the SML. The CML measures the hazard through standard divergence. or through a entire hazard factor. Difference Between Capital Market Line and Security Market Line Friday, October 22, The CML is a line that is used to show the rates of return, which depends on risk-free rates of return and levels of risk for a specific portfolio.
Oct 25, · The CML contains ONLY efficient portfolios (and plots return against volatiltiy; aka, total risk) while the SML plots any portfolio (and plots return against.