What is the difference between the SML and the CML?

Question

What is the difference?

SML= Security Market Line
CML= Capital Market Line

Answer 1

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
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.

Investopedia Says: 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

Answer 2

Cml Vs Sml

Answer 3

CML is a line that plots the return vs risk for a specific porfolio.SML is a line that plots the risk vs return for the market at a given time. A few differences are discussed below

Risk Measurement

CML uses standard deviation as the measure of risk
SML uses beta as the measure of risk

Efficient and Non-efficient

CML graph defines efficient portfolio
SML graph defines both efficient and non-efficient portfolios

Portfolio Vs Stock

CML determines risk or return for efficient portfolios
SML determines risk or return for individual stock

Answer 4

http://www.investopedia.com/terms/c/cml.asp