2006-12-13 08:41:50 · 5 answers · asked by timz987 1 in Business & Finance ➔ Investing
A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.
The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return.
The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is essentially the efficient frontier. This is achieved visually through the security market line (SML).
The line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.
The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The X-axis represents the risk (beta), and the Y-axis represents the expected return. The market risk premium is determined from the slope of the SML.
It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed.
2006-12-13 11:40:22 · answer #1 · answered by gcl915 2 · 1⤊ 0⤋
1
2017-03-01 05:53:07 · answer #2 · answered by ? 3 · 0⤊ 0⤋
similarities :both are a measure of risk and returns; both allocate for a risk free asset in both equations; both calculate for the market return.
differences: cml uses sigma ( standard deviation ) while the sml uses beta coefficient; cml measures systematic risk while sml measure both systematic and unsystematic risk. sml shows risk and return for individual assets while cml shows risk and return for entire portfolio
2016-04-25 07:40:08 · answer #3 · answered by ashlee 1 · 2⤊ 0⤋
Cml And Sml
2017-01-13 05:31:46 · answer #4 · answered by ? 4 · 0⤊ 0⤋
i don't know sorrie bye
2006-12-13 09:01:26 · answer #5 · answered by niña 2 · 0⤊ 2⤋