What is the Difference Between Capital Market Line (CML) and Security Market Line (SML)?

The Capital Market Line (CML) and the Security Market Line (SML) are both theoretical concepts that help investors understand risk and return in investment portfolios. However, they differ in their focus and applications:

Capital Market Line (CML):

• Focuses on portfolios that consist of a mix of risky and risk-free assets.
• Represents portfolios that optimally combine risk and return.
• Includes risk-free investments, which is a key distinction from the efficient frontier.
• Can be used to find the most efficient portfolio, called the tangency portfolio.

Security Market Line (SML):

• Represents the market's risk and return at a given time.
• Shows the expected returns of individual assets.
• Derived from the CML.
• Focuses on the relationship between systematic risk and expected return.

In summary, the CML is a theoretical concept that helps investors understand the optimal combination of risk and return in portfolios containing both risky and risk-free assets. On the other hand, the SML represents the market's risk and return at a given time and focuses on the relationship between systematic risk and expected return for individual assets. The SML is derived from the CML, and while both lines are related, they serve different purposes in understanding investment risk and return.

Comparative Table: Capital Market Line (CML) vs Security Market Line (SML)

The Capital Market Line (CML) and Security Market Line (SML) are both theoretical concepts in finance that help investors understand the relationship between risk and return. However, they have some key differences:

In summary, the CML is a more comprehensive concept that includes risk-free investments and helps investors determine the optimal mix of risky and risk-free assets, while the SML focuses on the risk and return of the market's risky assets at a given time. The CML is used to derive the SML, which is a more specific representation of market risk and return.