Can someone break down SML and CML? Thank you.

CFA Level I
#1

Can someone break down SML and CML? Thank you

#2

How? There are lots of ways. One can be the CML has std. dev. on the x-axis while the SML has beta.

#3

agree with Niblita and … I know, for sure, looking at the SML plots, which security is overprices and whice one is underpriced, because a efficient portfolio/security will always lie on the SML line. - Dinesh S

#4

CML - maximum return you can get for a given volatility level, security market line - expected return based on the stock beta.

#5

Briefly, some important differences between the SML and CML. 1) Measure of risk - SML uses systematic (non-diversifiable risk) - CML uses standard deviation (total risk) 2) Application - SML is a tool used to determine whether an individual security is properly priced - CML is used to determine the appropriate asset allocation between the risk-free asset and the market portfolio 3) Definition - SML is a graph of CAPM - CML is a graph of the efficient frontier 4) Slope - SML slope is market risk premium - CML slope equals the market portfolio Sharpe Ratio