Difference b/w CML and SML

CFA Level II
#1

Page 218 of Schweser’s Book 3 says: If markets are in equilibrium, risk and return combinations for individual securities will lie along the SML, but not along the CML. Risk and return combinations for individual securities will lie below the CML. I’m not getting this :frowning: Can someone explain? Thanks.

#2

CAPM is an equilibrium model. So all securities will plot on SML if markets are in equilibrium By definition only the market portfolio will plot on CML, individual securities do not.

#3

ok. So the SML will lie below the CML? always? or just when markets are in equilibrium?

#4

you cant compare the SML and CML… they are plotted using diff parameters for risk…

#5

Right!! Thanks!