Capital Market Line - CML

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 (beta) for a particular portfolio.

Notes:

The CML is derived by drawing a tangent line on the intercept point on the efficient frontier where the expected return equals the risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is essentially the efficient frontier. This is achieved visually through the security market line (SML).

See also: CAPM, Efficient Frontier, Modern Portfolio Theory - MPT, Standard Deviation