Security market line


Security market line

In Modern Portfolio Theory, the Security Market Line (SML) is the graphical representation of the Capital Asset Pricing Model. It displays the expected rate of return for an overall market as a function of systematic (non-diversifiable) risk (beta).

The Y-Intercept (beta=0) of the SML is equal to the risk-free interest rate. The slope of the SML is equal to the Market Risk Premium and reflects investors' degree of risk aversion at a given time.

When used in portfolio management, a single asset is plotted against the SML using its own beta and historical rate of return. If the plot of the asset falls above the SML it is considered to have a good rate of return relative to its risk, and vice versa if it falls below.


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  • security market line — Line representing the relationship between expected return and market risk or beta. The slope of this line is the risk premium for beta. Bloomberg Financial Dictionary + security market line The linear relationship between expected asset returns… …   Financial and business terms

  • Security market line — Line representing the relationship between expected return and market risk. The New York Times Financial Glossary …   Financial and business terms

  • security market line — noun A line representing the relationship between expected return and systematic risk, thus a graphical representation of the CAPM. It is valid both for portfolios and individual assets …   Wiktionary

  • Security Market Line - SML — A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities. Also refered to as the characteristic line . The SML essentially graphs the results from the capital …   Investment dictionary

  • security characteristic line — A plot on a graph of the excess return ( excess returns) on a security over the risk free rate as a function of the excess return ( excess returns) on the market. The slope of this line is the security s beta. Bloomberg Financial Dictionary …   Financial and business terms

  • Security characteristic line — A plot of the excess return on a security over the risk free rate as a function of the excess return on the market. The New York Times Financial Glossary …   Financial and business terms

  • capital market line — noun A line representing the relationship between expected return and standard deviation. See Also: capital allocation line, security market line …   Wiktionary

  • Capital Market Line - CML — A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk free rate of return and the level of risk (standard deviation) for a particular portfolio. The CML is derived by… …   Investment dictionary

  • Market portfolio — is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinitely divisible.[1] Richard Roll s critique… …   Wikipedia

  • Market Risk Premium — The difference between the expected return on a market portfolio and the risk free rate. Market risk premium is equal to the slope of the security market line (SML), a capital asset pricing model. Three distinct concepts are part of market risk… …   Investment dictionary


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