# What is the difference between Capital market line and security market line?

Capital Market Line
A capital market line (CML) is a line intersecting returns on no-risk investments and returns on the entire market. The difference between capital market line and efficient frontier, is that the capital market line includes no-risk investments. All portfolios along the capital market line are efficient portfolios. Capital market line is used to evaluate portfolio performance. Any point below any other point on the line will deliver lower returns but the same risk, and is therefore not ideal. Capital market line is referred to as a measure employed to evaluate portfolio performance. Capital market line or CML is a graph employed in asset pricing models to depict rates of return in a market portfolio. Capital market line describes rates of return for efficient portfolios that are dependent on level of risk and risk free rate of return for a specific portfolio. CML originates from the assumption that all investors will possess market portfolio. Quantum of risk is positively correlated to the expected return. Thus, equation representing expected return is as follows: Expected return = portfolio beta + risk-free rate

Capital market line is deduced by drawing a tangent line that starts from the intercept point located on efficient frontier and extends to the point where expected return matches risk free rate of return. Capital market line is believed to be a better measure than efficient frontier as it takes

while risk (standard deviation. . The further up. The further to the right. or sigma) is plotted on the xaxis. It displays the expected rate of return of an individual security as a function of systematic. All points on the CML have better risk-return profiles when compared to any portfolio located on efficient frontier. non-diversifiable risk (its beta). the higher the returns. Fig 1: Capital Market line Security Market Line The security market line (SML) is the graphical representation of the Capital asset pricing model. Returns are plotted on the y-axis. Investors need only asses their level of risk to find their optimal point on the line. That will tell them what type of returns they can expect.into consideration risk-free asset in a portfolio. the higher the risk. The Y-intercept (beta=0) of the SML is equal to the risk-free interest rate. The slope of the SML is equal to the market risk premium and reflects the risk return trade off at a given time: The Security Market Line is a line intersecting the risk-free rate of return (represented as r sub f) and the entire market (represented as M).

An investor can move up and to the right more (more risk. more returns) by borrowing money. and is therefore a curve. Fig 2: Security Market line . The Security Market Line is different than the efficient frontier in that the efficient frontier lacks the risk-free rate of return point.