Equilibrium Market Price of Risk

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Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the expected return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional expected return needed to compensate for a unit change in risk. The equation of the CML is defined by the capital asset pricing model.

In the capital asset pricing model, the extra return on an investment that an investor expects in exchange for accepting a greater degree of risk. The riskier an investment is, the greater return an investor expects. The equilibrium market price of risk is shown graphically as the slope of the capital market line, which plots the extra return expected for each change in level of risk. See also: Beta.

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