capital market line


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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.

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 the equilibrium market price of risk. See also: Beta.

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.
References in periodicals archive ?
The capital market line is the line that begins at the risk-free rate of return and "just touches" the efficient frontier.
Interestingly, this investor can increase return without increasing risk by alternatively investing X percent in the market portfolio and (1-X) percent in the risk-free treasury bill, and reach a point on the capital market line that is directly above the minimum variance portfolio.
While the investment policy remains feasible in principle, its performance falls short of the capital market line especially if the funding ratio becomes low.
Now an investment policy strictly in the interest of current beneficiaries and older workers ("income security") would prescribe moving on the line AA' as far as possible toward the capital market line CML, optimally reaching point [Q.sup.**].
As shown in Conclusion 1, an extremely low shortfall probability imposed on the portfolio ROR already suffices to undermine the feasibility of the insurer's investment policy (the boundary AA' running above the capital market line).
This implies that the solution of the optimization problem (59) can be found on the capital market line. Hence, we can replace (59) by optimization problem
Notice that the optimization (58) also reduces to a one-dimensional optimization over all portfolios on the capital market line.
For the logarithmic utility function u(x) = ln(x), one finds that the optimal portfolio [[??].sup.*] lies on the capital market line and is given by

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