I still don’t have clear understanding on this since level one. Someone could explain this by plain english?
dont forget Market Model
What don’t you really understand? It may be difficult to explain the entire concept behind each…I would look at that (I think) first reading in SS 18… CAL: graphs the combinations of risk free and risky assets E® = Rf + [(E(Rt) - Rf) / (std. t)] * std. port. CML: A verision of the CAL which has assumptions that all investors will hold the same portfolio E® = Rf + [(E(Rmarket) - Rf) / (std. market)] * std. port. SML: Graphs market (systematic) risk versus return of the entire market E® = Rf + Beta * (E(Rmarket) - Rf) Anybody please feel free to add to or correct…
I would add: There is only 1 CML vs. an unlimited # of CALs (the CAL will differ from investor to investor) Both the CML & CAL lie tangent to the efficient frontier tangency portfolio for CML is the market portfolio tangency portfolio for the CAL is the optimal risky portfolio for each individual investor
SML is the graph of the CAPM, with alphas orbiting its slope CML is the perfect CAL