What is the capital market line?

2 It is a junction between investment revenues that carry no risk and revenue from the entire market. The capital market line differs from the most famous “effective boundary” by involving investments without risk. This takes into account the risk associated with this asset, namely the element of this risk that cannot be alleviated by diversification. This risk applies to factors such as losing money through the impact of inflation or exchange rate of the currency. It is waiting to interact. While the formula seems complex, the results are clear when they are displayed on a graph that exposes the risk against return. The risk is listed as "beta", which means that part of more than one shows above average risk and below one shows below average risk. The resulting graph makes it easier to compare the price and the expected return of the asset against its risk as to whether the investment makes sense on paper. The line on the chart is known as the security market line.

The same graph can be used to look at the whole market. This is done by plotting a point for each individual asset where the ratio of return to risk is highest. The connection of these points creates a line, usually a curve that is known as an effective boundary.

The

capital market line is designed to allow the investor to consider the risks of an asset added in the context of its existing portfolio. This is first carried out by bringing a safety market line and an effective border curve for the same market. The capital market line then takes place between a point where the effective boundary captures the market line and point in which the expected return on the asset is the same as it could be achieved from risk -free investments. The theory is that all points on the capital market are the best possible combination of risk and return. This is because they offer better value than the market as a whole, but also offer better value than simply investing in risk assets.