Security Market Line

Security market line

Line representing the relationship between expected return and market risk or beta. The slope of this line is the risk premium for beta.

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Security Market Line

The linear relationship between expected asset returns and betas posited by the Capital Asset Pricing Model.

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security market line

A line used to illustrate the relationship between risk and return for individual securities. The security market line shows a positive linear relationship between returns and systematic risk as measured by beta.

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Security Market Line

In Markowitz Portfolio Theory, a line on a chart representing the capital asset pricing model. The security market line plots risk versus expected return of the market. The security market line is a useful tool in determining whether a given security is undervalued and/or a market outperform. If a security plots the security market line, it indicates a higher expected return for a given level of risk than the market as a whole.

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Security Market Line (SML)

What Does Security Market Line (SML) Mean?

A line that graphs the systematic or market risk versus the return of the whole market at a certain point in time. SML shows all risky marketable securities. Also referred to as the characteristic line.

Investopedia explains Security Market Line (SML)

The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium 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 its risk. Individual securities are plotted on the SML graph. If a 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.

Related Terms:
• Beta
• Capital Market Line
• Modern Portfolio Theory—MPT
• Systematic Risk
• Unsystematic Risk