SML vs CAL
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The document compares the Capital Allocation Line (CAL) and Security Market Line (SML) in investment decisions, highlighting their definitions and key differences. CAL represents combinations of risk-free and risky assets, focusing on portfolios, whereas SML reflects expected returns against systematic risk for individual securities. It discusses their risk measurement methods, slope determinants, and related formulas.
![1. Measurement of risk:
CAL and CML use SD (standard deviation) as the risk measure. SML, on the other hand, uses systematic risk.
2. Portfolios:
CAL shows the risk and reward tradeoff of a portfolio. SML, in contrast, shows the risk and reward tradeoff of security.
3. Slope:
Market risk premium helps to determine the slope of the SML. While the slope of CAL shows the additional return of a
portfolio due to the additional rise in risk.
4. Formula:
SML = Rf + [Beta * (Rm – Rf)]
CAL = (Portfolio Return – Risk-Free Return)/Standard Deviation of Portfolio.
Differences](https://image.slidesharecdn.com/smlvscal-210629132828/85/SML-vs-CAL-4-320.jpg)
SML vs CAL
- 2. 1. Meaning 2. Differences 3. Reference Content
- 3. 1. CAL (Capital Allocation Line): When we attempt to combine the portfolio of risk-free assets with the risky asset portfolio, a Capital Allocation Line comes up in a form of a Graph. Thus, CAL shows all the possible allocations and combinations between the risk- free and risky assets based on investor risk preferences. 2. SML (Security Market Line): SML graphically represents the CAPM. Basically, it shows the expected returns of assets depending on the non- diversifiable risk (or systematic risk). Meaning
- 4. 1. Measurement of risk: CAL and CML use SD (standard deviation) as the risk measure. SML, on the other hand, uses systematic risk. 2. Portfolios: CAL shows the risk and reward tradeoff of a portfolio. SML, in contrast, shows the risk and reward tradeoff of security. 3. Slope: Market risk premium helps to determine the slope of the SML. While the slope of CAL shows the additional return of a portfolio due to the additional rise in risk. 4. Formula: SML = Rf + [Beta * (Rm – Rf)] CAL = (Portfolio Return – Risk-Free Return)/Standard Deviation of Portfolio. Differences
- 5. Reference To know more about it, click on the link given below: https://efinancemanagement.com/investment-decisions/sml-vs-cal