capitcal market line VS security market line

CFA Level III
#1

Hello all, can anyone can advise the answer: 1. How does capital market line differ from security market line? 2. have any similar point bewteen capital market line and security market line?

#2

Isn’t this L1 stuff?

#3

sorry post in wrong level forum

#4

The two major differences are that: 1. CML only works for efficient portfolios, whereas SML works for both efficient portfolios and securities. 2. CML relies on total risk, whereas SML relies on systematic risk.

#5

Slope of CML is the sharp ratio Slope of SML is the MRP (market Risk Premium)

#6

thanks Frenchriviera and ws, could i ask "have there is similar point between bewteen capital market line and security market line? as i can’t this in all stuffs. Am i correct?

#7

And the big key: SML has Beta on the x-axis. CML has standard deviation on the x-axis. This reinforces frenchriviera’s point that SML represents market risk (the portion of security variation that can be explained by systematic factors), while CML talks about total risk (SD of the portfolio as a whole).

#8

Similiarity: They both start at RFR on the y-axis.

#9

Common things: - y-axis is the portfolio expected return - the line is starting at the risk-free rate (as mentioned by ws) and tangent to the efficient frontier at the market portfolio

#10

thanks all explanations