http://risklessreturn.blogspot.com/

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

2. 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.

3. Riskless Return

4. Riskless Return

5. 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.