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Security Market Line (SML) and Capital Market Line (CML)
 Security Market Line (SML)The Security Market Line plots the expected return for each level of Beta (exposure to market risk or systemic risk). For the model, the higher the beta, the greater the exposure to market risk and, therefore, the greater the expected return. High Beta assets (>1) are assets that do very well if the economy is doing well and very poorly if the economy is doing badly; such as retail and real estate. Low beta assets (<1) are assets that have a more stable return, such as the electricity sector. |  Security Characteristic Line (SCL)This is a graph made from a sample of assets (security). SCL is the average ratio between return on assets and excess market return relative to fixed income (Rm-Rf). S2 is an asset that was above expectations, it has positive alpha. On the other hand, S1 has negative alpha. The slope of the SCL is the Beta used in the SML. |  Capital Market Line (CML)Capital Market Line estimates the return of a portfolio with a part in fixed income and a part in the "market portfolio". The greater the allocation in the market portfolio, the greater the standard deviation of the portfolio and the greater the expected return. The efficient frontier will touch the CML in the ideal portfolio. |
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Subtitle
S = Supply Curve
D = Demand Curve
Q = Quantity
P = Price
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