What is a security market line?
The safety line, also known as SML and referred to as the characteristic line, is the graph of the Risk Return line. The line, which is the product of the capital assets (CAPM) prices, graphs the relationship between market risk and expected yield. Analysts use it to compare investment revenues with different portfoli. Specifically, the line helps analysts to recognize the reasonable level of risk is against a certain level of return. Usually, portfolio administrators are looking for other assets that could be added to the portfolio.
Investors usually want two things from the assets - no risk and much return - but this combination is difficult to find. Portfolio managers therefore use tools to help them determine the best assets of assets. The market safety line is a visual tool that helps managers and analysts to determine whether the market is exaggerated or insufficiently evaluated as an asset, which eventually leads to better decision -making and more profitable portfolio.
Capm is used to determine the return for a particular asset. The formula is pcs = Krf + B (km - Krf) , where is the level of return for the security, zrf is the risk rate of return, km is beta. Beta represents a non -universified risk; This means that a risk that cannot be diversified by its own share portfolio. Based on Beta Beta, the market safety line begins with a risk -free rate or zero risk and moves up and right. Low -risk investment is located at the beginning of the line, so the higher the investment on the line, the more risky the security.
If the line for individual security above the portfolio security line indicates that the shares are underestimated. If the supply is carried under it, it means Stock is overvalued. In the former case, the investor can expect a greater return on the level of risk; In the second caseThe investor can expect to gain less return than comparable securities with the same level of risk. In other words, SML helps portfolio managers to determine the optimal level of return due to a certain level of risk. It can also change as a result of macroeconomic factors such as growth in the economy, changes in global capital and inflation conditions.