Capital Market Line

Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio. The line represents the risk premium you earn for taking on extra risk. Defined by the capital asset pricing model.

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capital market line

The line used in the capital-asset pricing model to present the rates of return for efficient portfolios. These rates will vary depending upon the risk-free rate of return and the level of risk (as measured by beta) for a particular portfolio. The capital market line shows a positive linear relationship between returns and portfolio betas. Also called market line. See also alpha, beta, systematic risk.

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Capital Market Line

In the capital asset pricing model, a line that plots the extra return an investor expects for each change in the level of risk. Rational investors expect higher returns for riskier assets and the capital market line shows this graphically. A portfolio that accurately reflects the capital market line is considered a Markowitz efficient portfolio. The slope of the capital market line is a calculation of theequilibrium market price of risk. See also: Beta.

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Capital Market Line (CML)

What Does Capital Market Line (CML) Mean?

A line used in the capital asset pricing model that plots 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.

Investopedia explains Capital Market Line (CML)

The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. The CML is considered superior to the efficient frontier because 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 represented visually by the security market line (SML).

Related Terms:
• Capital Asset Pricing Model—CAPM
• Efficient Market Hypothesis—EMH
• Modern Portfolio Theory—MPT
• Standard Deviation
• Volume