Dear All:
CML is for a portfolio of stocks . I would like to confirm SML is for individual security or can be for portfolio?
Thank you so much for your time
Good question. I do know that SML works with portfolios too and that it has beta as the risk measure, not the variance as in CML. However, I’m not sure if my understanding is correct in saying that an efficient protfolio will always plot on the CML, and that a non-efficient portfolio plots on the SML, but never on the CML!
SML stands for security market line. It measures expected return as a function of beta in relation to the market portfolio. Hypothetically, given a portfolio comprised 100% of stocks, and you sum up the individual stocks’ expected returns derived from SML, I guess you would effectively have used SML for portfolio (if this is what you’re asking). However, I doubt that you would see a that on the exam. Just remember CAL is for asset allocation and that SML is for estimating expected return based on beta.