Security Market Line - SML
外汇网2021-06-19 13:54:51
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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 asset pricing model (CAPM) formula. The x-axis repsents the risk (beta), and the y-axis repsents the expected return. The market risk pmium is determined from the slope of the SML. The security market line is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return for risk. Inpidual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because the investor would be accepting less return for the amount of risk assumed.
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