What’s the difference? Also in another post regarind the SML someone wrote: The beta of the market portfolio is always equal to 1 Can someone please explain that?
CML: You measure the relationship between Expected return and Expected risk (sigma) for a determinated portafolio. All the which sit on the CML is “efficient”, however the market porfolio M (given by the combination of risk-free and risky assets) is the one tangent to the efficient frontier. Note: Because M is considered the “market porfolio” it represent the market, hence it has a beta=1 SML: You measure the relationship between Expected return and beta (systematic risk that investors are exposed to and therefore that they should be expecting returns for). All properly priced porfolio (hence diversified) sit on the SML.
perfect thanks a lot
Correct me if I am wrong. They are the same thing except the x axis is different in magnitude. When beta is one for SML, the CML is at Rf + 1(Rm - Rf).