Cml vs sml

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

2. 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. The equation of CML is where: is stock ’s expected return is market’s expected return is the risk-free rate of return is stock ’s total risk , is market’s total risk.  

4. The equation of SML is where: is stock ’s expected return is market’s expected return is the risk-free rate of return is stock ’s systematic risk .  

5. 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.