SML vs CML
Download as PPTX, PDF0 likes954 views
The document compares the Security Market Line (SML) and the Capital Market Line (CML), highlighting their definitions and differences. SML illustrates the relationship between the required rate of return and non-diversifiable risk, while CML represents the expected return for efficient portfolios. Overall, CML is considered superior to SML in terms of efficiency and risk measurement.
SML vs CML
- 2. 1. Meaning 2. Differences 3. Reference Content
- 3. CML (Capital Market Line): It is a graphical representation that tells the rate at which the securities are providing a return. SML (Security Market Line): It tells the relation between the required rate of return of security as a function of the non-diversifiable risk. Meaning
- 4. 1. Portfolios: SML defines both functioning and non-functioning portfolios. CML defines only functioning or efficient portfolios. 2. Functioning: SML is known to be less efficient than CML. 3. Objective: SML’s objective is to illustrate all security factors. CML describes only the market portfolios and risk-free investments. 4. How risk is measured? SML uses the beta coefficient to calculate the risk. CML, on the other hand, uses standard deviation to calculate the risk. 5. Graph: In SML, the Y-axis represents the return of securities, while X-axis shows the beta of security. In CML, Y-axis represents the expected return of the portfolio while the X-axis indicates the standard deviation of the portfolio. Differences
- 5. 6. Portfolio of individual security SML determines all the security-related factors or the risk or return for individual stocks. CML determines market portfolio and risk-free assets, or the risk or return for efficient portfolios. 7. Superior: CML is superior to SML. Differences
- 6. Reference To know more about it, click on the link given below: https://efinancemanagement.com/investment-decisions/sml-vs-cml