Capital Market Line graphically represents all portfolios with an optimal combination of risk and return. https://efinancemanagement.com/investment-decisions/capital-market-line

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/capital-market-line
Capital Market Line

2. 1. Meaning
2. Equation of Capital Market Line
3. Components of Capital Market Line
4. Limitations
5. Reference
Content

3. Capital Market Line graphically represents all portfolios with an optimal combination of risk and return. Risk is
represented by using a standard deviation on the x-axis, while the y-axis represents the expected return of a
portfolio. The capital market line assumes the risk portfolio as a market portfolio.
Meaning

4. The equation of the capital market line is:
E (R)p= RFR + SDp * {E (R)m – RFR}/SDm
Where,
E (R)p = The return an investor expects from a portfolio
RFR = Risk-free rate
SDp = Standard deviation of the portfolio
E (R)m = Expected return from the market
SDm = Standard deviation of the market
Equation of Capital Market Line

5. Components of capital market line are as follows:
1. Slope:
CML assumes that the entire risk portfolio is the market portfolio. Therefore, the slope of the CML is the Sharpe Ratio
of the portfolio.
2. The Efficient Frontier:
A combination of risky assets is depicted by the efficient frontier. A line that is drawn tangentially to the Efficient
Frontier from the rate of return that is risk-free is the capital market line.
Components of Capital Market Line

6. Followings are the limitations of capital market line:
• Presence of friction.
• Taxes and transaction cost.
• The difference in investors worldwide.
• Ignores different types of risks.
• Absence of risk free asset.
• The flaw in risk free rates.
Limitations

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/capital-market-line