Riskless Return

Capital Market Line (CML)

vs
Security Market Line (SML)
by Riskless Return
http://risklessreturn.blogspot.com/
 Riskless Return

• According to CAPM, CML and SML are both

half-lines that connect the risk-free asset with
the market portfolio.

• CML is defined in expected return – standard

deviation (total risk) space.

• SML is defined in expected return – beta

(systematic risk) space.
Riskless Return
Riskless Return
 Riskless Return

• Efficient portfolios that offer the highest

return for a given level of risk lie on the CML,
and inefficient portfolios lie below it.

• All portfolios (both efficient and inefficient

ones) should lie on the SML.

• The equation of SML is the CAPM equation.