SML: Gimme my Alpha, honey!

Know the CML + SML concepts cold. recall that under the SML = overvalued and above it, the stock is cheap If it is not on the SML, there is an alpha opp Most securities cannot sit directly on SML b/c of trans. costs Am i missing anything else ? The CML, SML, and CAPM all tie in beautifully

SML uses Beta on axis CML used STD on axis correct me if im wrong?

u are right, my friend THANKS

Do you think we need to remember the assumptions for both SML and CML?

ELABORATE

Yes, the assumption are fundamental: - All investor want to be on the efficient frontier. - investor can borrow and lend at the nominal risk free-rate - all investors have honogenous expectations (EMH) - All investors have the same one-period horizon. - All investments are infinitely divisible. - There are no taxes or transaction costs. - There is no inflation or any hange in interest rates. - Capital market are in equilibrim However, some assumption can be relaxed such as: - It is possible to include transaction costs, which will shift the CML - Expectation are unique to each investors.

it is precisely b/c of trans costs that the stocks cannot rest flatly on the SML

daj224 Wrote: ------------------------------------------------------- > it is precisely b/c of trans costs that the stocks > cannot rest flatly on the SML While if we have long/short position (consider hedge fund) we will have a kinked CML

“While if we have long/short position (consider hedge fund) we will have a kinked CML” b/c why??? B/c I am doing some borrowing to the right of the portfolio M, right? ???

daj224 Wrote: ------------------------------------------------------- > “While if we have long/short position (consider > hedge fund) we will have a kinked CML” > > > b/c why??? B/c I am doing some borrowing to the > right of the portfolio M, right? ??? BINGO!

left = lenders :slight_smile:

" left = lenders :)" VERY NICE, Thanks. Acronyms and devices like this DO HELP!!