I see how CAL becomes CML… but I don’t see how CML becomes SML, I don’t see how they relate? if u do paint da picture so I see too …please.
Due to diversification, only system risk is paid off. When unsystematic risk diversified away, SML use Beta instead of variance(total risk) in CML.
CML: E(Rp)=Rf + S(Rp)/S(Rm) * ( E(Rm) - Rf ) since on CML: S(Rp)=Bp*S(Rm), so -> Bp=S(Rp)/S(Rm) Substitute this value in the first equation and you get SML Does this help?