CML and SML

CFA Level I
#1

So, I’ve put some effort into grasping the different allocation lines and market lines. But somehow it doesn’t click yet.

I understand the basic notion the CML uses combinations of the Risk Free Asset and a Asset/Portfolio, and give the Expected Return based on Total Risk (sigma).

For SML I understand that it is a combination of the Riskfree Asset and an Asset/Portfolio, giving an Expected Return based on systematic risk. Meaning in this case it is the Return you get when you diversify away the unsystematic risk.

I understand what Beta means, and how you calculate it from sigma. So I - think - I know the difference. But the actual usage of the two and differences are not clear to me.

What should the CML represent and what should the SML represent?

I’m a bit lost, but I know I’m very close to nailing it.

#2

I wrote an article about these that may be of some help: http://financialexamhelp123.com/cal-vs-cml-vs-sml/

#3

Thanks.

I will have a look tomorrow. Kudos for the quick reply.

Time now for some rest.

#4

Thanks i was confused as well. always mixed those two up