What Is a Capital Market Line?

The Capital Market Line (CML for short) refers to a ray indicating a simple linear relationship between the expected return of an effective combination and the standard deviation. It is a portfolio of risky assets and risk-free assets along the effective boundary of the portfolio.

Capital market line

(1) The horizontal axis of the "capital market line" is "standard deviation (including both systemic risk and non-systematic risk)", and the horizontal axis of the "stock market line" is "beta (only systemic risk);

(2) "Capital market line" reveals the trade-off relationship between risk and reward "in the case of holding different proportions of risk-free assets and market portfolios"; "Secure market line" reveals "the risks and rewards of the securities themselves" Correspondence between

(3) The x-axis "Q" in the "capital market line" is not the "beta" in the stock market line, the "yield return of the risk portfolio" in the y-axis in the capital market line, and the "average stock requirement" in the stock market line "Yield" means different things;

(4) The capital market line indicates the "expected rate of return", that is, the expected rate of return "after" the investment; the securities market line indicates the "required rate of return", that is, the minimum rate of return required to invest "before" ;

(5) The role of the stock market line is to calculate the intrinsic value of the stock using the stock valuation model based on the "required rate of return"; the role of the capital market line is to determine the proportion of the investment portfolio.

(6) Both SML and CML can describe the relationship between risk and return, but the risk in CML refers to the total risk, and the risk in SML is systemic risk.

(7) SML applies to individual securities or portfolios, and CML only applies to valid portfolios.