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Intro to Finance: What’s the difference Between SML and CML
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Intro to Finance: What’s the difference Between SML and CML
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2023-03-15T10:00:11+00:00
2023-03-15T10:00:11+00:00 1 Answer
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The Security Market Line (SML) and Capital Market Line (CML) are two important concepts in finance that help investors understand how to build a well-diversified portfolio that balances risk and return.
The main difference between the SML and CML is the type of assets they are used to evaluate:
Security Market Line (SML): The SML is a graphical representation of the expected return of a security or portfolio as a function of its systematic, or market risk. It is used to determine the fair return on a particular security or portfolio, based on its level of risk. In other words, the SML shows the expected return of a security or portfolio relative to its level of risk, as measured by its beta (systematic risk).
Capital Market Line (CML): The CML is a graphical representation of the risk-return tradeoff for a well-diversified portfolio. It is used to determine the optimal mix of risky and risk-free assets that will provide the highest return for a given level of risk. The CML assumes that investors can borrow and lend money at the risk-free rate to create a portfolio that maximizes their expected return for a given level of risk.
In summary, the SML is used to evaluate individual securities or portfolios, while the CML is used to evaluate a well-diversified portfolio that combines risky and risk-free assets. Both the SML and CML help investors determine the expected return of their investments relat