When we attempt to combine the portfolio of risk-free assets with the risky asset portfolio, a Capital Allocation Line comes up in a form of a Graph. https://efinancemanagement.com/investment-decisions/sml-vs-cal

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eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/sml-vs-cal
SML vs CAL

2. 1. Meaning
2. Differences
3. Reference
Content

3. 1. CAL (Capital Allocation Line):
When we attempt to combine the portfolio of risk-free assets with the risky asset portfolio, a Capital Allocation Line
comes up in a form of a Graph. Thus, CAL shows all the possible allocations and combinations between the risk-
free and risky assets based on investor risk preferences.
2. SML (Security Market Line):
SML graphically represents the CAPM. Basically, it shows the expected returns of assets depending on the non-
diversifiable risk (or systematic risk).
Meaning

4. 1. Measurement of risk:
CAL and CML use SD (standard deviation) as the risk measure. SML, on the other hand, uses systematic risk.
2. Portfolios:
CAL shows the risk and reward tradeoff of a portfolio. SML, in contrast, shows the risk and reward tradeoff of security.
3. Slope:
Market risk premium helps to determine the slope of the SML. While the slope of CAL shows the additional return of a
portfolio due to the additional rise in risk.
4. Formula:
SML = Rf + [Beta * (Rm – Rf)]
CAL = (Portfolio Return – Risk-Free Return)/Standard Deviation of Portfolio.
Differences

5. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/sml-vs-cal